corporate governance

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pages: 304 words: 80,965

What They Do With Your Money: How the Financial System Fails Us, and How to Fix It by Stephen Davis, Jon Lukomnik, David Pitt-Watson

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activist fund / activist shareholder / activist investor, Admiral Zheng, banking crisis, Basel III, Bernie Madoff, Black Swan, centralized clearinghouse, clean water, computerized trading, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, crowdsourcing, David Brooks, Dissolution of the Soviet Union, diversification, diversified portfolio, en.wikipedia.org, financial innovation, financial intermediation, fixed income, Flash crash, income inequality, index fund, information asymmetry, invisible hand, Kenneth Arrow, light touch regulation, London Whale, Long Term Capital Management, moral hazard, Myron Scholes, Northern Rock, passive investing, performance metric, Ponzi scheme, principal–agent problem, rent-seeking, Ronald Coase, shareholder value, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, Steve Jobs, the market place, The Wealth of Nations by Adam Smith, transaction costs, Upton Sinclair, value at risk, WikiLeaks

• Facebook features dozens of governance commentators who post media reports, video links, and opinions on issues and events. Facebook groups also foster dialogue and collective action. • LinkedIn, the social networking site pitched to professionals, features groups that host crossborder dialogue on corporate governance. One, run out of Canada, has more than twenty thousand participants. • Harvard Law School’s Forum on Corporate Governance and Financial Regulation has become a prime resource for academic papers and comment on corporate governance in the United States. Sponsors have vastly magnified their outreach by posting regular notices on Twitter at @HarvardCorpGov.43 • The granddaddy of social media in corporate governance is www.corpgov.net, founded and edited by California-based James McRitchie. He has been posting news and analysis and inviting dialogue on the site since 1995, which makes its origins virtually prehistoric

In 2011, the Millstein Center for Corporate Governance and Performance, then at the Yale School of Management, launched a multistakeholder research inquiry into the idea of an authoritative national governance code for the United States. Nearly every other significant market has a corporate governance code of some kind. 14. In the United States, for example, the SEC had proposed that mutual fund boards be composed of 75 percent independent directors and that the chair be independent of the fund company. Though the rule was overturned on procedural grounds, many mutual fund groups effectively follow the proposal as a way of aligning interest. 15. See ICGN Statement of Principles for Institutional Investor Responsibilities (International Corporate Governance Network, 2013) and ICGN Global Governance Principles (International Corporate Governance Network, 2014), www.icgn.org. 16.

For example, a US federal court found that an electrical engineering company and the record keeper of its 401(k) plan had violated fiduciary duty. The result: $37 million less in savings than there should have been. John F. Wasik, “Finding, and Battling, Hidden Costs of 401(k) Plans,” New York Times, November 7, 2014. 3. The United States is an exception, as it has no national authoritative corporate governance code. 4. Nolan Haskovec, Working Paper: Codes of Corporate Governance: A Review (Yale School of Management-Millstein Center for Corporate Governance and Performance, June 2012), http://web.law.columbia.edu/sites/default/files/microsites/millstein-center/Codes%20of%20Corporate%20Governance_Yale_053112.pdf. Index Accountability: civil society and, 119–23 confidence in free enterprise and, 96 government fund governance regulation and, 107–9 information and, 149–50 in mutual funds, 102–3 institutional investors and, 109–14 of fiduciaries to citizen investors, 230 regulations fostering, 147–49 restoring to asset management, 221–22 social media and, 114–19 trust in government and, 141 Accounting standards, 185 Action Plan (EU), 9 Activism Score, 121 Adelphia Communications, 44, 248n50 Admati, Anat, 215 Advance Voting Instructions (AVI), 91 Affiliation scams, 264n10 AFL-CIO, 120–21 Agency capitalism, 33, 74–80 Agency system, 32 Alberta (Canada) Investment Management Corporation, 59 Alpha, 49–50, 57, 241n41 Ambachtsheer, Keith, 100–101 Ambachtsheer gap, 100–101, 250n5 American Business Conference, 91 Annual fees, 1–3, 53–54, 233n2, 238n6 Annuity, 2–3, 198–99, 233n4, 264n7 AODP.


pages: 368 words: 32,950

How the City Really Works: The Definitive Guide to Money and Investing in London's Square Mile by Alexander Davidson

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accounting loophole / creative accounting, algorithmic trading, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, Big bang: deregulation of the City of London, capital asset pricing model, central bank independence, corporate governance, Credit Default Swap, dematerialisation, discounted cash flows, diversified portfolio, double entry bookkeeping, Edward Lloyd's coffeehouse, Elliott wave, Exxon Valdez, forensic accounting, global reserve currency, high net worth, index fund, inflation targeting, intangible asset, interest rate derivative, interest rate swap, John Meriwether, London Interbank Offered Rate, Long Term Capital Management, margin call, market fundamentalism, Nick Leeson, North Sea oil, Northern Rock, pension reform, Piper Alpha, price stability, purchasing power parity, Real Time Gross Settlement, reserve currency, Right to Buy, shareholder value, short selling, The Wealth of Nations by Adam Smith, transaction costs, value at risk, yield curve, zero-coupon bond

The future The FSA’s principles-based regime, with its emphasis on management responsibility, as discussed in Chapter 22, makes corporate governance a major issue. Regulators, senior management, listing authorities, analysts and investor-related trade bodies have an interest. Rating agencies take account of corporate governance when they give companies a credit rating. In 2007, corporate governance was a frequent theme on FSA supervisory visits to financial services companies. It is a key focus for compliance and risk management functions within the firm. _________________________ OVERVIEW OF CORPORATE GOVERNANCE 231  Over time, there will be pressure from the stock market, environmental and other groups, and league tables to promote good standards, according to consultants. How far companies see corporate governance as red tape, and how far they apply it in spirit, remains an issue, particularly, industry sources believe, for some foreign companies trading their shares in London.

In 1776, Adam Smith said in his book Inquiry into the Nature and Cause of the Wealth of Nations that managers could not be expected to manage other people’s money with ‘the same anxious vigilance with which the partners in a private copartnery frequently watch over their own’, and that ‘negligence and profusion, therefore, must always prevail’. The corporate governance framework in the UK and elsewhere has, at least since the early 1990s, been a mixture of regulation and best practice. There has been more regulation introduced into the UK’s corporate governance framework recently. Much of it has been through the EU, including the Business Review (see Chapter 26) and mandatory audit committees, but some has arrived in the new Companies Act, including codification of directors’ duties. Most independent studies on different corporate governance regimes place the UK at or near the top in standards. The UK approach combines high  224 HOW THE CITY REALLY WORKS ________________________________ standards of corporate governance with relatively low costs, is proportionate, and is relatively prescriptive about how the company’s board organises itself, according to a November 2006 publication, The UK Approach to Corporate Governance, by the Financial Reporting Council (FRC), which is responsible for corporate governance in the UK.

The UK approach combines high  224 HOW THE CITY REALLY WORKS ________________________________ standards of corporate governance with relatively low costs, is proportionate, and is relatively prescriptive about how the company’s board organises itself, according to a November 2006 publication, The UK Approach to Corporate Governance, by the Financial Reporting Council (FRC), which is responsible for corporate governance in the UK. Clearly corporate governance has made enormous progress since the business excesses of the late 1980s, including collapses such as that of Polly Peck, and frauds such as the plundering by Robert Maxwell, chairman of Mirror Group Newspapers, of his companies’ pension funds (see Chapter 31). The Cadbury Code To combat such abuses, the Committee on the Financial Aspects of Corporate Governance was set up in 1991. It was also known as the Cadbury Committee, after its chairman Sir Adrian Cadbury, and was backed by the FRC, the London Stock Exchange (LSE) and the accounting profession.

Global Governance and Financial Crises by Meghnad Desai, Yahia Said

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Asian financial crisis, bank run, banking crisis, Bretton Woods, capital controls, central bank independence, corporate governance, creative destruction, credit crunch, crony capitalism, currency peg, deglobalization, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, floating exchange rates, frictionless, frictionless market, German hyperinflation, information asymmetry, knowledge economy, liberal capitalism, liberal world order, Long Term Capital Management, market bubble, Mexican peso crisis / tequila crisis, moral hazard, Nick Leeson, oil shock, open economy, price mechanism, price stability, Real Time Gross Settlement, rent-seeking, short selling, special drawing rights, structural adjustment programs, Tobin tax, transaction costs, Washington Consensus

Worse still, with minimal evidence and faulty reasoning, the 1997–98 crises in the region have been blamed on these institutions, almost as if they were solely responsible for creating the conditions for the crises just waiting to happen. Not surprisingly then, from this perspective, thoroughgoing corporate governance reforms should be given top priority while the pre-crisis systems need to be abandoned altogether. The IMF pushed for radical corporate governance reforms claiming that corporate governance was at the root of the crisis, with some reform-minded East Asian governments agreeing. However, it is doubtful that corporate governance was a major cause of the crisis, though there were some symptoms of corporate distress in all the crisis-affected economies before the crisis. First, corporate profitability was deteriorating, more rapidly in Thailand, but also elsewhere in East Asia.

Past IMF consultations with various governments have been unable to prevent major financial turmoil, with the frequency of currency and financial crises increasing, rather than decreasing, with financial liberalisation in the last two decades. Corporate governance14 Many institutional arrangements in the most crisis-affected economies probably contributed to ‘catching-up’ at some point in the past. While many such institutional features may no longer be desirable or appropriate, or worse, have become dysfunctional, contemporary advocates of corporate governance reform usually fail to even acknowledge that they may have once been conducive to economic growth, rapid accumulation and structural change. This is largely due to ideological presumptions about what constitutes good corporate governance, usually inspired by what has often been termed the AngloAmerican model of capitalism. From this perspective, pre-crisis economic institutions were undesirable for various reasons, especially in so far as they departed from such a model.

These reforms generally sought to transform existing corporate governance arrangements, regarded as having caused over-investment, other ills and abuses (mainly at the expense of minority shareholder interests), in line with ostensibly ‘universal’Anglo-American standards.15 However, the recent East Asian economic recovery experiences imply that it was clearly more important to 102 Jomo Kwame Sundaram first improve the macroeconomic environment and remove systemic risks in the financial system. There is no evidence whatsoever that the simultaneous attempts at radical corporate governance reforms contributed to economic recovery in any decisive way. As in the rest of the region, the Korean recovery has been mainly driven by typically Keynesian policies, and certainly not by reforms in corporate governance. Foreign capital returned to Korea after the economy began picking up from November 1998, after uncertainties had been substantially reduced.


pages: 772 words: 203,182

What Went Wrong: How the 1% Hijacked the American Middle Class . . . And What Other Countries Got Right by George R. Tyler

8-hour work day, active measures, activist fund / activist shareholder / activist investor, affirmative action, Affordable Care Act / Obamacare, bank run, banking crisis, Basel III, Black Swan, blood diamonds, blue-collar work, Bolshevik threat, bonus culture, British Empire, business process, capital controls, Carmen Reinhart, carried interest, cognitive dissonance, collateralized debt obligation, collective bargaining, commoditize, corporate governance, corporate personhood, corporate raider, corporate social responsibility, creative destruction, credit crunch, crony capitalism, crowdsourcing, currency manipulation / currency intervention, David Brooks, David Graeber, David Ricardo: comparative advantage, declining real wages, deindustrialization, Diane Coyle, Double Irish / Dutch Sandwich, eurozone crisis, financial deregulation, financial innovation, fixed income, Francis Fukuyama: the end of history, full employment, George Akerlof, George Gilder, Gini coefficient, Gordon Gekko, hiring and firing, income inequality, invisible hand, job satisfaction, John Markoff, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, labor-force participation, labour market flexibility, laissez-faire capitalism, lake wobegon effect, light touch regulation, Long Term Capital Management, manufacturing employment, market clearing, market fundamentalism, Martin Wolf, minimum wage unemployment, mittelstand, moral hazard, Myron Scholes, Naomi Klein, Northern Rock, obamacare, offshore financial centre, Paul Samuelson, pension reform, performance metric, pirate software, Plutocrats, plutocrats, Ponzi scheme, precariat, price stability, profit maximization, profit motive, purchasing power parity, race to the bottom, Ralph Nader, rent-seeking, reshoring, Richard Thaler, rising living standards, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, Sand Hill Road, shareholder value, Silicon Valley, South Sea Bubble, sovereign wealth fund, Steve Ballmer, Steve Jobs, The Chicago School, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, transcontinental railway, transfer pricing, trickle-down economics, tulip mania, Tyler Cowen: Great Stagnation, union organizing, Upton Sinclair, upwardly mobile, women in the workforce, working poor, zero-sum game

Sordidly, it turns out that the donor, Baron von Finck, Germany’s richest man, is a tax dodger closeted in a Swiss castle.17 That revelation quickly proved toxic in a sober Germany scandalized by this homegrown version of pay-to-play US politics. The reaction was swift and severe. Since 2010, the FDP has been on life support. It may even fall below the 5 percent threshold required to hold any parliamentary seats in the 2013 elections.18 Corporate Governance: Codetermination The differences between the family capitalism countries and Reagan-era America is not just seen in attitude, voter expectations, outcomes, or executive morality. There are quite significant structural differences as well. The most important is the device at the center of the black box of corporate governance in northern Europe, which accounts for Germany in particular being the globe’s most competitive economy. I mentioned earlier that shareholder capitalism places America at a competitive disadvantage, in part because it empowers short-termism.

Weak R&D, productivity growth, and lower innovation provide evidence that Reaganomics is anti-growth. That explains the judgment rendered on shareholder capitalism by Lynn Stout, Cornell University professor of corporate and business law at the June 2012 Harvard Law School Forum on Corporate Governance and Financial Regulation: “Worse, when we look at macroeconomic data—overall investment returns, numbers of firms choosing to go or remain public, relative economic performance of ‘shareholder-friendly’ jurisdictions—it suggests the shareholder value dogma may be economically counterproductive.”54 How Family Capitalism Avoids Weak Corporate Governance Cutting R&D or human capital investment is scarcely the prescription for firm and shareholder prosperity. That’s why economists like Edmund Phelps have argued that sustained new longer-term investment by US firms is needed, in innovation, in cutting-edge products, and in business methods, to boost employment and productivity.55 But refocusing the US corporation takes an attribute in scant supply among jittery American executives: a willingness to explain to boards, colleagues, and investors that a long-term perspective will be more profitable for shareholders.

Employers and shareholders there, and at firms such as Adidas or VW-Audi-Porsche, would snicker at the notion. Codetermination is the innovation that has had the most impact on corporate governance since World War II—the black box at the economic core of the most competitive high-wage democracies in the world. And codetermination is the only proven option for creating the American Dream for your children. As the home of the Reformation, the Renaissance, John Calvin, John Locke, Rousseau, Voltaire, Adam Smith, and Friedrich Hayek, it is no surprise that northern Europe also became the center over the last century of reforms to strengthen capitalism. The explanation for that outcome is straightforward: voters have expectations of superior corporate governance. Enterprises are the device rich democracies have crafted to create rising living standards for all; maximizing that goal requires high-quality management committed to productivity growth and amenable to broadcasting the gains from such growth throughout society.


pages: 443 words: 51,804

Handbook of Modeling High-Frequency Data in Finance by Frederi G. Viens, Maria C. Mariani, Ionut Florescu

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algorithmic trading, asset allocation, automated trading system, backtesting, Black-Scholes formula, Brownian motion, business process, continuous integration, corporate governance, discrete time, distributed generation, fixed income, Flash crash, housing crisis, implied volatility, incomplete markets, linear programming, mandelbrot fractal, market friction, market microstructure, martingale, Menlo Park, p-value, pattern recognition, performance metric, principal–agent problem, random walk, risk tolerance, risk/return, short selling, statistical model, stochastic process, stochastic volatility, transaction costs, value at risk, volatility smile, Wiener process

The customer perspective emphasizes the lifetime relationship and service delivery with clients. 2 Even though the Standard & Poor’s corporate governance scoring has been very successful in emerging markets, Standard & Poor’s corporate governance services decided to withdraw from the US market in September 2005. 52 CHAPTER 3 Using Boosting for Financial Analysis and Trading 3. The internal processes perspective focuses on the use of clients’ information to sell new products and services according to the clients’ needs. 4. The learning and growth perspective is the foundation of the BSC. This perspective looks at the motivation, training, and capacity to innovate that employees need to have in order to implement the new strategies. Different from the corporate governance scorecards presented at the beginning of this section, which emphasize corporate governance scoring, Kaplan and Nagel (2004) proposed the creation of a board BSC that includes corporate governance variables and is oriented to strategic planning at the board level.

Finally, this research can also be extended using boosting for the design of the enterprise BSC and by including other perspectives of those reviewed in this study. References 69 Initially, the corporate governance variables did not seem to be very relevant to predicting corporate performance. However, when the results of these variables were interpreted together with the accounting variables using representative ADTs, the effect of corporate governance on performance became evident as the BSC demonstrated. A similar situation may happen with the variables of the other perspectives of the BSC. The recent cases of US bankruptcies have demonstrated that when companies are doing very well, corporate governance variables do not seem to be relevant. However, in moments of financial distress, corporate governance variables play a very important role in improving performance and efficiency. In this respect, another future direction for this research line is the evaluation of the abnormal return of two portfolios with top and bottom tier companies based on the suggestions of the representative ADTs and board BSC.

See also Volatility index (VIX) comparing, 105–106 convergence of, 105 Contaminated returns, variance and covariance of, 257 Continuous integral operator, 367 Continuous semimartingales, 246, 253 Continuous-time long-memory stochastic volatility (LMSV) model, 220 Continuous-time stochastic modeling, 3 Continuous-time vintage, 78 Convergence-of-interests hypothesis, 54 Convex duality method, 296 Copula models, 77 Copulas, 75–76 CorpInterlock, 62, 63 Corporate governance, 53–54 of S&P500 companies, 54–60 Corporate governance best practices, 59 Corporate governance scorecards, 51–52 Corporate governance variables, 69 interpreting S&P500 representative ADTs with, 58–59 Corporate performance, predicting, 69 Correlation coefficient, 400 Correlation fluctuations impact on securitized structures, 75–95 products and models related to, 77–79 Cost structures, 392 424 Covariance(s) estimating, 244 forecasting, 280–285 Covariance function, 252 Covariance matrix, 170 Covariance stationarity, 177, 179, 181 Covariation-realized covariance estimator, 266 Covolatility function, 249 Covolatility measurement/forecasting, as a key issue in finance, 243 Cox, Ingersoll, Ross (CIR) square-root model, 257 cpVIX, 103 Crash imminence, precautions against, 121 Creamer, Germán, xiii, 47 Crisis detection, 131 Crisis-related equity behavior, 150 Cubic-type kernels, 261, 263 Cumulative abnormal return, 62, 63 Cumulative consumption process, 297, 305–306 Cumulative distribution curve, 346 Cumulative distribution function, 176 Current market volatility distribution, estimating, 115 Current weighting, 49 Customer perspective, 51 Cutting frequency, 258, 259 cVIX-1, 101, 102.


pages: 339 words: 109,331

The Clash of the Cultures by John C. Bogle

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asset allocation, collateralized debt obligation, commoditize, corporate governance, corporate social responsibility, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, diversified portfolio, estate planning, Eugene Fama: efficient market hypothesis, financial innovation, financial intermediation, fixed income, Flash crash, Hyman Minsky, income inequality, index fund, interest rate swap, invention of the wheel, market bubble, market clearing, money market fund, mortgage debt, new economy, Occupy movement, passive investing, Paul Samuelson, Ponzi scheme, principal–agent problem, profit motive, random walk, rent-seeking, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, shareholder value, short selling, South Sea Bubble, statistical arbitrage, survivorship bias, The Wealth of Nations by Adam Smith, transaction costs, Vanguard fund, William of Occam, zero-sum game

Ownership has its privileges—one of the most important of which is to ensure that the interests of shareholders are served before the interests of management. But most short-term renters of stocks are not particularly interested in assuring that corporate governance is focused on placing the interests of the stockholder first. Even long-term owners of stocks have not seemed to care very much about exercising their rights—and indeed their responsibilities—of stock ownership. The agency society I’ve described earlier has too often failed to lend itself to significant involvement in corporate governance. Index funds ought to be in the vanguard of serious reforms, for they can’t and don’t sell stocks of companies whose managements are deemed to have produced inadequate returns on the capital they oversee. Despite the growing importance of index funds, many managers are loath to rock the boat, let alone engage in a more muscular activism, including proxy proposals, director nominations, executive compensation, and vigorous advocacy.

This practice is a far cry, not only from activism and advocacy, but from the very process of corporate governance. Most mutual funds have failed to live up to their responsibilities of corporate citizenship. Thanks to Congress and the SEC, there has been halting movement to give stock owners some access to participation in corporate proxies. In the 2012 “proxy season” (usually the spring), a wide range of proposals by shareholders are appearing on a variety of issues, including the issues of executive pay and corporate political contributions. Increasingly, the proposals are included in corporate proxies. Now the financial institutions that hold absolute control over Corporate America will have to stand up and be counted, unless, of course, they choose to abstain. Why Mutual Funds Are Passive Participants in Corporate Governance The reasons for this passivity by institutional investors are not hard to fathom.

Given the drive to attract corporate clients, the reluctance of fund managers to risk the opprobrium of potential clients by leaping enthusiastically into the controversial areas of corporate governance is discouraging, but hardly astonishing. One manager hit the nail on the head with this (perhaps apocryphal) comment: “There are only two kinds of clients we can’t afford to offend: actual and potential.” A third obstacle to activism, or so it has been alleged by the fund industry, is that corporate activism would be expensive for the funds to undertake. In a sense, it would be. Yet TIAA-CREF, whose investment portfolio totals some $500 billion, is unique in this industry in taking on the responsibilities of corporate activism. Several years ago, it spent an amount said to exceed $2 million per year on the implementation of its splendid—and productive—corporate governance program.3 This expenditure, however, would amount to but 0.003 percent (3/1,000ths of 1 percent) of its present invested assets.


pages: 586 words: 159,901

Wall Street: How It Works And for Whom by Doug Henwood

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accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, affirmative action, Andrei Shleifer, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, borderless world, Bretton Woods, British Empire, capital asset pricing model, capital controls, central bank independence, computerized trading, corporate governance, corporate raider, correlation coefficient, correlation does not imply causation, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, dematerialisation, diversification, diversified portfolio, Donald Trump, equity premium, Eugene Fama: efficient market hypothesis, experimental subject, facts on the ground, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, George Akerlof, George Gilder, hiring and firing, Hyman Minsky, implied volatility, index arbitrage, index fund, information asymmetry, interest rate swap, Internet Archive, invisible hand, Irwin Jacobs, Isaac Newton, joint-stock company, Joseph Schumpeter, kremlinology, labor-force participation, late capitalism, law of one price, liberal capitalism, liquidationism / Banker’s doctrine / the Treasury view, London Interbank Offered Rate, Louis Bachelier, market bubble, Mexican peso crisis / tequila crisis, microcredit, minimum wage unemployment, money market fund, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, oil shock, Paul Samuelson, payday loans, pension reform, Plutocrats, plutocrats, price mechanism, price stability, prisoner's dilemma, profit maximization, publication bias, Ralph Nader, random walk, reserve currency, Richard Thaler, risk tolerance, Robert Gordon, Robert Shiller, Robert Shiller, selection bias, shareholder value, short selling, Slavoj Žižek, South Sea Bubble, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Market for Lemons, The Nature of the Firm, The Predators' Ball, The Wealth of Nations by Adam Smith, transaction costs, transcontinental railway, women in the workforce, yield curve, zero-coupon bond

Stockholders were nearly wiped out, and the asbestos victims' awards were strictly capped. The moral — the corporate governance moral, that is, leaving aside the stingy treatment of the injured — is that the financier on the board may be quiet when things are going well, but in a crisis, he or she may be a crucial player. The Johns-Manville example may be a model of the broader upsurge of financial influence; financiers may have been satisfied with corporate performance during the Golden Age, but more recent decades have been the economy-wide equivalent of an asbestos crisis. This might be a good time to take a look at recent theories of corporate governance. Jensenism Starting in the mid-1970s, Michael Jensen, Chicago-school fellow traveller now at Harvard, began developing a finance-based theory of corporate governance that would become influential in the 1980s.

"Free-Trade Pact Stirs Emotions," New York Newsday, August 7. Black, Fisher (1986). "Noise," Journal of Finance i\ (July), pp. 529-543. Black, Fisher, and Myron Scholes (1973). "The Pricing of Options and Corporate Liabilities," Journal of Political Economy d>\, pp. 637-654. Blair, Margaret M, ed. (1993). The Deal Decade: What Takeovers and Leveraged Buyouts Mean for Corporate Governance C^diShmgion: Brookings Institution). — (1995). Ownership and Control: Rethinking Corporate Governance for the Twenty-First Century V^zshm^ion: Brookings Institution). Blair, Margaret M., and Martha A. Schary (1993a). "Industry-Level Indicators of Free Cash Flow," in Blair (1993), pp. 99-147. — (1993b). "Industry-Level Pre.ssures to Restructure," in Blair (1993), pp. 149-203-Blanchard, Olivier, Changyong Rhee, and Lawrence Summers (1993).

., 182 liberals incorrect position on Fed, 123 upscale, 311 Lintner, John, 162 Liscio, John, 102, 104 Litan, Robert, 88 Livingston, James, 93-94 localism often not progressive, 302-303 London Interbank Offered Rate (LIBOR), 35 London Stock Exchange, 13 Long, William, 283-284 loose-money ideology, 301 Malkiel. Burton, 105 Malthus, Thomas Robert, 209 Malthusianism, green, 245 Managerial school, 251 managerialism, 258; see also corporations, governance managers hired by workers, 239; see also corporations, governance; money managers Mandeville, Bernard, 208-210 Manhattan, income distribution, 79 Manne, Henry, 277, 278 manufacturing, FIRE "output" surpasses, 76 margin, 30 market(s) apologists, 179-183 clearing vs. nonciearing, 138 information asymmetry and, 172 costlessness/expense of, 138, 139 failures, 138 freedom of (Marx), 231 incomplete, 179 manipulation of, 53, 105 religious belief in, 150 self-regulating, and governance issue, 247 Markowitz, Harry, 179 Marx, Kari, 13, 135, 187, 229-241 anticipation of governance literature, 246 on credit as boundary-smasher, 235 as fundamental, 244 corporate form as presaging worker control (Marx), 239-240 critique of Ricardo's self-realization, 213-214 as endogenist, 220-221 gold in a crisis, 221 on government debt, 24 on interest rates, 244 on interest-bearing capital, 22 and Keynes, 212-214 on money and crisis, 232-236 as object of greed, 236 and power, 231-232, 320 no abolition of interest alone, 237 primitive accumulation, 252 revenue vs. capital, 245 on unproductive labor, 209 wrong on bailouts, 235 Marxian views of finance, 244 Marxism as Benthamism (Keynes), 212 mathematics required for economics, 139 Matthei, Charles, 314 Maxxam, 274 Mayer, Martin, 89 McDonough, William, 40 mean reversion, 178 Means, Gardiner C, 246, 252-256. 257-258 media, financial.


pages: 261 words: 103,244

Economists and the Powerful by Norbert Haring, Norbert H. Ring, Niall Douglas

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accounting loophole / creative accounting, Affordable Care Act / Obamacare, Albert Einstein, asset allocation, bank run, barriers to entry, Basel III, Bernie Madoff, British Empire, central bank independence, collective bargaining, commodity trading advisor, corporate governance, creative destruction, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, diversified portfolio, financial deregulation, George Akerlof, illegal immigration, income inequality, inflation targeting, information asymmetry, Jean Tirole, job satisfaction, Joseph Schumpeter, Kenneth Arrow, knowledge worker, labour market flexibility, law of one price, light touch regulation, Long Term Capital Management, low skilled workers, mandatory minimum, market bubble, market clearing, market fundamentalism, means of production, minimum wage unemployment, moral hazard, new economy, obamacare, old-boy network, open economy, Pareto efficiency, Paul Samuelson, pension reform, Ponzi scheme, price stability, principal–agent problem, profit maximization, purchasing power parity, Renaissance Technologies, rolodex, Sergey Aleynikov, shareholder value, short selling, Steve Jobs, The Chicago School, the payments system, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, ultimatum game, union organizing, Vilfredo Pareto, working-age population, World Values Survey

According to their research, an investment strategy that bought the shares of the 10 percent of firms with the strongest shareholder rights and sold the 10 percent of firms with the weakest shareholder rights, would have earned returns that were 8.5 percentage points higher than normal (Gompers, Ishii and Metrick 2003). According to Bebchuk, Cohen and Ferrell (2009), the 24 ingredients to this corporate governance index can be reduced to just 6 important elements, which all measure in one way or another the degree of entrenchment of top managers (i.e. how hard it is for shareholders to get rid of them). Cuñat, Gine and Guadalupe (2010) examined shareholder-sponsored corporate government proposals in two thousand widely held US corporations from 1997 to 2007 and compared the stock market reaction to proposals that narrowly failed to those which narrowly passed. They found that narrow passage of a proposal increases the stock market value of a firm by almost 3 percent. For corporate government measures that are included in the G-index developed by Gompers et al., the reaction is even stronger.

—Jay Ritter, 2008 Law and finance scholars Lucian Bebchuk and Jesse Fried focused on what Jensen, Murphy and their followers had neglected: the control of managers over boards and over compensation committees. They examined pay-for-performance compensation schemes as they developed starting in the 1990s and checked if their actual features conformed more to the optimal contracting approach of principal–agent theory or to what they call the managerial power approach. Their book, Pay Without Performance, became a watershed in the economic corporate governance discussion. It gave real world power issues in corporate governance a name and made it a stumbling block in the way of the economic mainstream (Bebchuk and Fried 2003; Bebchuk and Fried 2004). According to the managerial power approach, managers create compensation schemes that are as favorable to them as possible under what they call the “outrage constraint.” The possibility of the outrage of shareholders and the general public provides the most binding restraint on the generosity of management pay.

Bebchuk, Lucian A., Alma Cohen and Allen Ferrell. 2009. “What Matters in Corporate Governance.” Review of Financial Studies 22: 783–827. Bebchuk, Lucian A., Alma Cohen and Holger Spaman. 2010. “The Wages of Failure: Executive Compensation at Bear Stearns and Lehman 2000–2008.” Yale Journal of Regulation 27: 257–82. Bebchuk, Lucian, A. and Jesse M. Fried. 2003. “Executive Compensation as an Agency Problem.” Journal of Economic Perspectives 17: 71–82. . 2004. Pay Without Performance: The Unfulfilled Promise of Executive Compensation. Cambridge, MA: Harvard University Press. Bebchuk, Lucian A., Yanif Grinstein and Urs Peyer. 2010. “Lucky CEOs and Lucky Directors.” Journal of Finance 65: 2363–2401. . Forthcoming. “Corporate Governance and the Timing of Option Grants.” Journal of Finance. Becht, Marco, Patrick Bolton and Ailsa Röell. 2007.


pages: 430 words: 109,064

13 Bankers: The Wall Street Takeover and the Next Financial Meltdown by Simon Johnson, James Kwak

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Andrei Shleifer, Asian financial crisis, asset-backed security, bank run, banking crisis, Bernie Madoff, Bonfire of the Vanities, bonus culture, break the buck, capital controls, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, commoditize, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Edward Glaeser, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, financial intermediation, financial repression, fixed income, George Akerlof, Gordon Gekko, greed is good, Home mortgage interest deduction, Hyman Minsky, income per capita, information asymmetry, interest rate derivative, interest rate swap, Kenneth Rogoff, laissez-faire capitalism, late fees, light touch regulation, Long Term Capital Management, market bubble, market fundamentalism, Martin Wolf, money market fund, moral hazard, mortgage tax deduction, Myron Scholes, Paul Samuelson, Ponzi scheme, price stability, profit maximization, race to the bottom, regulatory arbitrage, rent-seeking, Robert Bork, Robert Shiller, Robert Shiller, Ronald Reagan, Saturday Night Live, Satyajit Das, sovereign wealth fund, The Myth of the Rational Market, too big to fail, transaction costs, value at risk, yield curve

Joh reports chaebol rankings for each year from 1993 through 1997 from the Korea Fair Trade Commission. Joh, “Corporate Governance and Firm Profitability,” supra note 4, at Table 10. Based on total assets belonging to firms in the same chaebol, Hanbo was number 14 in 1995, up from number 28 in 1994. 10. See Donald Kirk, Korean Crisis: Unraveling of the Miracle in the IMF Era (New York: Palgrave, 2001), chapter 8. 11. See Stephan Haggard, The Political Economy of the Asian Financial Crisis (Washington: Peterson Institute for International Economics, 2000), 56–57. 12. Sung Wook Joh, “Korean Corporate Governance and Firm Performance” (working paper, 12th NBER seminar on East Asian Economics, 2001). 13. Joh, “Corporate Governance and Firm Profitability,” supra note 4. See also Jae-Seung Baek, Jun-Koo Kang, and Kyung Suh Park, “Corporate Governance and Firm Value: Evidence from the Korean Financial Crisis,” Journal of Financial Economics 71 (2004): 265–313. 14.

“Hear: Geithner’s Stress Test” (podcast), Planet Money, February 25, 2009, audio available at http://www.npr.org/blogs/money/2009/02/hear_geithners_stress_test.html. 55. Department of the Treasury, TARP Standards for Compensation and Corporate Governance, June 10, 2009, available at http://www.treas.gov/press/releases/reports/ec%20ifr%20fr%20web%206.9.09tg164.pdf. 56. Stephen Labaton and Edmund L. Andrews, “Geithner Said to Have Prevailed on the Bailout,” The New York Times, February 9, 2009, available at http://www.nytimes.com/2009/02/10/business/economy/10bailout.html. 57. Department of the Treasury, TARP Standards for Compensation and Corporate Governance, supra note 55. 58. Stephen Labaton, “Treasury to Set Executives’ Pay at 7 Ailing Firms,” The New York Times, June 10, 2009, available at http://www.nytimes.com/2009/06/11/business/11pay.html. 59.

Hanna managed William McKinley’s successful 1896 presidential campaign and dominated the Republican Party machine into the Theodore Roosevelt years; Aldrich was one of the most powerful men in the Senate and largely dictated its positions on government regulation of industry and banking.45 Political representation for rising industrial interests is preferable to ossified social structures that restrict innovation and keep new people away from the levers of power.46 Most of the European societies that had such restrictions struggled to keep up with the Industrial Revolution and fell behind their competitors. The United States also turned out much better than Latin American countries, such as Mexico, which started at roughly similar income levels but where elites controlled concentrated banking systems; in some cases a lack of effective corporate governance led to nepotism and insider transactions that took advantage of outside shareholders.47 At the same time, however, the openness of the American political system has always made it possible for the current business elite to use its political power to shift the economic playing field in its favor. Any growing and profitable sector can take this route, from railroads, steel, and automobiles to defense and energy.


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The Inequality Puzzle: European and US Leaders Discuss Rising Income Inequality by Roland Berger, David Grusky, Tobias Raffel, Geoffrey Samuels, Chris Wimer

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Branko Milanovic, Celtic Tiger, collective bargaining, corporate governance, corporate social responsibility, double entry bookkeeping, equal pay for equal work, fear of failure, financial innovation, full employment, Gini coefficient, hiring and firing, illegal immigration, income inequality, invisible hand, labour market flexibility, labour mobility, Long Term Capital Management, microcredit, offshore financial centre, principal–agent problem, profit maximization, rent-seeking, shareholder value, Silicon Valley, Silicon Valley startup, time value of money, very high income

What should the private sector and government do to address rising inequality? I think much of this lies in corporate governance. It’s very difficult for one company to take action in isolation from the others, which is where I think the state, and perhaps beyond the state, Europe and North America, have to do something concerted. But I do think it helps having shareholder organizations demanding that pay is more long-term related. There are different elements to consider. It has long been the case in Germany that you didn’t just get your bonuses linked to shareholder value, you get it from market share, which was something real and could be measured – the social market concept that you have to show organic growth, not just financial 76 J. Monks chicanery. I wouldn’t say that Germany is a model of corporate governance, it isn’t, but I do think that is the direction I would like to see people going, trying to structure business rewards so they are not just linked to short-term shareholder value, mergers and acquisition deals, many of which go wrong.

The press has been quite adept at using CEO profiles and lifestyle portraits to raise public anger during a recession, but the media target the wrong subject because they confuse the agent for the principal. The Board and the remuneration committee set executive compensation, and it is the much more complicated issue of corporate governance that deserves more public attention. The ultimate principals, of course, are the shareholders, but the complexities are such that it is much easier to broadcast segments about CEO paychecks than discuss corporate governance issues. Five Principles for Moving Forward 207 The principal-agent problem, where the agent acts as the principal rather than advancing the interests of the owner, is neither unique to CEOs and business, nor is it a contemporary issue. Ancient Roman legislators in various periods, avowedly voting in the interests of the people, craftily, and sometimes quite openly, promoted their own interests.

We will not attempt to provide a protracted account of the political, economic, social, and cultural sources for this complex pattern of change. Although the consensus view continues to be that much of the increase in inequality stems from a rising demand for skilled labor and a corresponding increase in the payout to such labor, it’s likely that other sources are also implicated, such as globalization, market liberalization, changing tax policies, financial innovation, changing social mores, deunionization, changing corporate governance, market failure, and shifting demographics. It is well beyond the scope of this book to offer new evidence on these competing accounts. Rather, we would like to present the accounts of rising inequality that business, political, and labor elites tend to mention. Why are these accounts so important? The most obvious reason is that business, political, and labor elites have a special vantage point that scholars, the usual purveyors of scientific analysis, cannot readily access.


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Makers and Takers: The Rise of Finance and the Fall of American Business by Rana Foroohar

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3D printing, accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, additive manufacturing, Airbnb, algorithmic trading, Alvin Roth, Asian financial crisis, asset allocation, bank run, Basel III, bonus culture, Bretton Woods, British Empire, call centre, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, centralized clearinghouse, clean water, collateralized debt obligation, commoditize, computerized trading, corporate governance, corporate raider, corporate social responsibility, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, crowdsourcing, David Graeber, deskilling, Detroit bankruptcy, diversification, Double Irish / Dutch Sandwich, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial deregulation, financial intermediation, Frederick Winslow Taylor, George Akerlof, gig economy, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, High speed trading, Home mortgage interest deduction, housing crisis, Howard Rheingold, Hyman Minsky, income inequality, index fund, information asymmetry, interest rate derivative, interest rate swap, Internet of things, invisible hand, John Markoff, joint-stock company, joint-stock limited liability company, Kenneth Rogoff, knowledge economy, labor-force participation, labour mobility, London Whale, Long Term Capital Management, manufacturing employment, market design, Martin Wolf, money market fund, moral hazard, mortgage debt, mortgage tax deduction, new economy, non-tariff barriers, offshore financial centre, oil shock, passive investing, Paul Samuelson, pensions crisis, Ponzi scheme, principal–agent problem, quantitative easing, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, Rana Plaza, RAND corporation, random walk, rent control, Robert Shiller, Robert Shiller, Ronald Reagan, Satyajit Das, Second Machine Age, shareholder value, sharing economy, Silicon Valley, Silicon Valley startup, Snapchat, sovereign wealth fund, Steve Jobs, technology bubble, The Chicago School, the new new thing, The Spirit Level, The Wealth of Nations by Adam Smith, Tim Cook: Apple, Tobin tax, too big to fail, trickle-down economics, Tyler Cowen: Great Stagnation, Vanguard fund, zero-sum game

If every asset manager in the country were forced to use his or her corporate proxy vote (the vote that gives them a say on issues like executive pay, corporate boards, and even some big company decisions) to help enforce better corporate governance, they could help businesses push back against the short-term pressure from Wall Street for quick returns and easy profits that undermine longer-term growth. (Such actions would work only if the entire system were focused on passively managed funds, so that fund managers themselves didn’t have incentives to push the quarter over the longer haul.) To be sure, some fund managers have complained that such forays into corporate governance would be too costly. Yet one large asset manager, TIAA-CREF, has already taken on the challenge. A few years back it started allocating more than $1 million a year to its corporate governance program—an expenditure that amounted to only about three-tenths of a percent of its total invested assets,51 which would seem to be well worth the cost.

“If you could sit in on some of these board meetings, you’d be shocked,” says Icahn, who compares CEOs and boards to eating-club presidents and their slightly dumber friends whose job it is to make them look good. Plenty of other activist investors actually believe that their brand of activism is the cure for what ails America, both economically and socially. Icahn, for one, blames “poor corporate governance for a growing disparity in income and slow growth” in the country. “If we don’t get better corporate governance, we’re going to lose our hegemony,” he says.51 It’s a fascinating inversion of logic. But the truth is that most activists don’t develop deep relationships with the firms they invest in; they merely troll through SEC filings looking for indications that a company might be weak or underpriced—and then pounce. That’s what Relational Investors did to find Timken, and that’s what Icahn does to find many of the firms that he pursues.

“Money management, by definition, extracts value from the returns earned by our business enterprises,” says Bogle.47 Indeed, most mutual fund managers are essentially takers, not makers. But if more of them use their power to buy and hold shares of firms that practice good corporate governance and follow business strategies that support the real economy, then finance could potentially become not an impediment to growth but in fact a true supporter of it. It’s a bold goal, but one that authentic wealth makers like Bogle believe is attainable. Indeed, he believes it’s something that the father of modern capitalism, Adam Smith, would have favored. Bogle recalls a conversation he had a few years back with several other big fund managers who’d gotten together to talk about how the industry might encourage better corporate governance within firms. Bogle felt that asset managers like Vanguard had the potential to play a critical role in fighting off activist investors (like the sort covered in chapter 4) and the high-frequency traders of the world.


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The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer by Dean Baker

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accounting loophole / creative accounting, affirmative action, Asian financial crisis, Bretton Woods, corporate governance, declining real wages, full employment, index fund, Jeff Bezos, medical malpractice, medical residency, money market fund, offshore financial centre, price discrimination, risk tolerance, spread of share-ownership

We know this because individuals form corporations, even though it means that they have to pay a corporate income tax in addition to the income tax paid by individual shareholders.3 As a condition of gaining corporate status, the government can and does set rules for corporate governance. (For example, there are extensive rules on the rights of minority shareholders.) Rules of corporate governance could easily include provisions that put a check on runaway CEO pay. For example, it would be relatively simple to require that pay packages be periodically subject to approval by a majority of shareholders, in an election in which only the shares that are actually voted count. (Most corporations count shares that are not voted as supporting the management’s position.) Whether or not such rules on corporate conduct are desirable is a debatable issue, but in a world where the government by definition sets the rules for corporate governance, any set of rules necessarily involves government intervention.

In effect, the rules placed on corporate conduct are part of quid pro quo involved in establishing a corporation. The reason that the government allows individuals to form corporations is that it wants to facilitate economic growth, but the government will be less effective in promoting this goal if it does not put in place the right set of rules for corporate governance. As it stands, there are already extensive sets of rules regarding corporate governance. The government imposes a long list of requirements on corporations regarding issues such as financial disclosure, elections of corporate boards, and protection of minority shareholders. Most of these rules are not controversial; they are seen as laying the groundwork for the effective operation of a modern market economy. There would be few people anxious to buy shares in a company if they couldn’t obtain financial information on the company and have some assurance that its reported profits, assets, and liabilities were accurate measures of its financial situation.

Corporate share ownership allows anonymity in ways that are not in general possible in a partnership. 3 Congressional Budget Office (2006, Table 4-2). 41 rules on corporate governance prevent such events, and thereby give the public assurance about the soundness of investing in shares of stock. This is useful background in thinking about high CEO pay. What is it that allowed Michael Eisner to earn $680 million in the years from 1998 to 2000 when he was the CEO of the Disney Corporation, or Robert Grasso to pocket $140 million from running the New York Stock Exchange? The conservative nanny state crew wants us to believe that it was their incredible skill and hard work that allowed these CEOs to earn such vast sums. The more obvious answer is that badly designed rules of corporate governance allow CEOs to pilfer large amounts of money from the corporations they manage, because there is no one with both the interest and power to challenge them.


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The Bankers' New Clothes: What's Wrong With Banking and What to Do About It by Anat Admati, Martin Hellwig

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Andrei Shleifer, asset-backed security, bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, bonus culture, break the buck, Carmen Reinhart, central bank independence, centralized clearinghouse, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, diversified portfolio, en.wikipedia.org, Exxon Valdez, financial deregulation, financial innovation, financial intermediation, fixed income, George Akerlof, Growth in a Time of Debt, income inequality, invisible hand, Jean Tirole, joint-stock company, joint-stock limited liability company, Kenneth Rogoff, Larry Wall, light touch regulation, London Interbank Offered Rate, Long Term Capital Management, margin call, Martin Wolf, money market fund, moral hazard, mortgage debt, mortgage tax deduction, negative equity, Nick Leeson, Northern Rock, open economy, peer-to-peer lending, regulatory arbitrage, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, Satyajit Das, shareholder value, sovereign wealth fund, technology bubble, The Market for Lemons, the payments system, too big to fail, Upton Sinclair, Yogi Berra

Some losses from the bets got socialized—picked up by the taxpayers.” Hayes (2012, 99) refers to “IBGYBG” (I’ll be gone, you’ll be gone) as a theme that underlies risk-taking incentives. 28. UBS (2008). 29. See McLean and Elkind (2004) and Hayes (2012). Wilmarth (2007) describes how cases such as those of Enron and WorldCom represented a double failure of corporate governance. In addition to the immediate corporate governance failures at the failed firms, banks experienced their own corporate governance failures as they breached their fiduciary duties and exposed themselves to massive legal and reputational risks in their rush to reap short-term profits by servicing the fraudulent schemes of Enron and WorldCom. L. McDonald (2010) gives an insider’s account of the fall of Lehman Brothers and how a short-term focus can infuse an organization’s corporate culture.

“Systemic Aspects of Risk Management in Banking and Finance.” Swiss Journal of Economics and Statistics 131: 723–737. ———. 1998. “Banks, Markets, and the Allocation of Risks,” Journal of Institutional and Theoretical Economics 154: 328–351. ———. 2000. “On the Economics and Politics of Corporate Finance and Corporate Control.” In Corporate Governance, ed. X. Vives. Cambridge, England: Cambridge University Press. 95–134. ———. 2005. “Market Discipline, Information Processing, and Corporate Governance.” In Corporate Governance in Context: Corporations, States, and Markets in Europe, Japan, and the US, ed. K. J. Hopt, E. Wymeersch, H. Kanda, and H. Baum. Oxford, England: Oxford University Press. 379–402. ———. 2009. “Systemic Risk in the Financial Sector: An Analysis of the Subprime-Mortgage Financial Crisis.” The Economist 157: 129–207. ———. 2010a.

Regulation would be easier to enforce if it were supported by policies allowing investors and supervisors to better monitor and control bankers’ risk taking. Making derivatives markets more transparent, for example by forcing many of them to public exchanges, would make it harder for bankers to hide the risks they are taking. Effective corporate governance is also important. If bank managers cannot be controlled by their boards and shareholders, their behavior can be particularly dangerous. Laws and regulations that promote responsible corporate governance can help reduce the conflict between those who make decisions within financial institutions and others in the economy who might be harmed but have no control. The Essential Element: Political Will Once the problems in the financial system are identified properly, much can be done to create a better system that supports the economy without subjecting all of us to excessive risks.


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The Wisdom of Finance: Discovering Humanity in the World of Risk and Return by Mihir Desai

activist fund / activist shareholder / activist investor, Albert Einstein, Andrei Shleifer, assortative mating, Benoit Mandelbrot, Brownian motion, capital asset pricing model, carried interest, collective bargaining, corporate governance, corporate raider, discounted cash flows, diversified portfolio, Eugene Fama: efficient market hypothesis, financial innovation, follow your passion, George Akerlof, Gordon Gekko, greed is good, housing crisis, income inequality, information asymmetry, Isaac Newton, Jony Ive, Kenneth Rogoff, Louis Bachelier, moral hazard, Myron Scholes, new economy, out of africa, Paul Samuelson, Pierre-Simon Laplace, principal–agent problem, Ralph Waldo Emerson, random walk, risk/return, Robert Shiller, Robert Shiller, Ronald Coase, Silicon Valley, Steve Jobs, The Market for Lemons, The Nature of the Firm, The Wealth of Nations by Adam Smith, Tim Cook: Apple, transaction costs, zero-sum game

Directed by Mel Brooks. By Mel Brooks. Performed by Zero Mostel, Gene Wilder, and Estelle Winwood. United States: Embassy Pictures, 1968. Film; Kashner, Sam. “The Making of The Producers.” Vanity Fair, January 2004, 108–40; Tynan, Kenneth. “Frolics and Detours of a Short Hebrew Man.” New Yorker, October 30, 1978, 46–131. An excellent source for the corporate governance literature is Shleifer, Andrei, and Robert Vishny. “A Survey of Corporate Governance.” Journal of Finance 52, no. 2 (June 1997): 737–83. Some of the primary work on the agency problem includes Fama, Eugene F. “Agency Problems and the Theory of the Firm.” Journal of Political Economy 88, no. 2 (1980): 288–307; Jensen, Michael C., and William H. Meckling. “Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure.”

“Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers.” American Economic Review 76, no. 2 (1986): 323–27; Jensen, Michael C. “Value Maximization, Stakeholder Theory, and the Corporate Objective Function.” Journal of Applied Corporate Finance 14, no. 3 (Fall 2001): 8–21. For my take on recent developments in the capital markets and on corporate governance, see Desai, Mihir A. “The Incentive Bubble.” Harvard Business Review 90, no. 3 (March 2012): 123–29. Other sources cited in chapter 1 on moral hazard are excellent sources for corporate governance issues as well. An excellent textbook treatment of these issues is provided in Tirole, Jean. The Theory of Corporate Finance. Princeton, NJ: Princeton University Press, 2006. For an international perspective, see La Porta, Rafael, Florencio Lopez-De-Silanes, and Andrei Shleifer. “Corporate Ownership Around the World.”

That messiness is what most of us experience every day, and that is the subject of corporate finance. The next four chapters consider all this messiness. The fourth chapter considers what happens when the relationship between investors and the underlying productive assets they own is mediated by human beings with their own motivations. The resulting emphasis on the relationship between principals (shareholders) and agents (managers) is the problem of corporate governance—and arguably the central problem of modern capitalism. The principal-agent problem, as demonstrated by Mel Brooks’s The Producers and E. M. Forster’s A Room with a View, is also a powerful frame for situations in our life when we are, consciously or unconsciously, behaving on behalf of others. Now that companies have been introduced, we can consider when and how they should combine with each other—an activity known as merging.


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Rethinking Capitalism: Economics and Policy for Sustainable and Inclusive Growth by Michael Jacobs, Mariana Mazzucato

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3D printing, balance sheet recession, banking crisis, basic income, Bernie Sanders, Bretton Woods, business climate, Carmen Reinhart, central bank independence, collaborative economy, complexity theory, conceptual framework, corporate governance, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, crony capitalism, David Ricardo: comparative advantage, decarbonisation, deindustrialization, dematerialisation, Detroit bankruptcy, double entry bookkeeping, Elon Musk, endogenous growth, energy security, eurozone crisis, factory automation, facts on the ground, fiat currency, Financial Instability Hypothesis, financial intermediation, forward guidance, full employment, G4S, Gini coefficient, Growth in a Time of Debt, Hyman Minsky, income inequality, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), Internet of things, investor state dispute settlement, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, labour market flexibility, low skilled workers, Martin Wolf, mass incarceration, Mont Pelerin Society, neoliberal agenda, Network effects, new economy, non-tariff barriers, paradox of thrift, Paul Samuelson, price stability, private sector deleveraging, quantitative easing, QWERTY keyboard, railway mania, rent-seeking, road to serfdom, savings glut, Second Machine Age, secular stagnation, shareholder value, sharing economy, Silicon Valley, Steve Jobs, the built environment, The Great Moderation, The Spirit Level, Thorstein Veblen, too big to fail, total factor productivity, transaction costs, trickle-down economics, universal basic income, very high income

Stiglitz, Volume II: Information and Economic Analysis: Applications to Capital, Labor, and Product Markets, Oxford, Oxford University Press, 2013, pp. 432–46. 29 The author was a participant in some of these battles. For a more extensive discussion of them, and their consequences, see J. E. Stiglitz, Roaring Nineties, New York, W. W. Norton, 2003. There were other later battles, for example concerning say in pay and other reforms in corporate governance. For a discussion of the kinds of reforms in tax and corporate governance laws that might make a difference, see J. E. Stiglitz, Rewriting the Rules, Hyde Park, NY, The Roosevelt Institute, May 2015. 30 T. Philippon and A. Reshef, ‘Wages and human capital in the US financial industry: 1909–2006’, The Quarterly Journal of Economics, vol. 127, no. 4, 2012, pp. 1551–609. 31 D. Baker and T. McArthur, The Value of the ‘Too Big to Fail’ Big Bank Subsidy, Center for Economic and Policy Social Research Issue Brief, September 2009.

It is not helpful to think of markets as pre-existing, abstract institutions which economic actors (firms, investors and households) ‘enter’ to do business, and which require them, once there, to behave in particular ways. Markets are better understood as the outcomes of interactions between economic actors and institutions, both private and public. These outcomes will depend on the nature of the actors (for example, the different corporate governance structures of firms), their endowments and motivations, the body of law and regulation and cultural contexts which constrain them and the specific nature of the transactions which take place. Markets are ‘embedded’ in these wider institutional structures and social, legal and cultural conditions.38 In the modern world, as Polanyi pointed out, the concept of a ‘free’ market is a construct of economic theory, not an empirical observation.39 Indeed, he observed that the national capitalist market was effectively forced into existence through public policy—there was nothing ‘natural’ or universal about it.40 The orthodox notion of competition between firms is equally misleading.

Polanyi, The Great Transformation: The Political and Economic Origins of Our Time, Boston, MA, Beacon Press, 2001 [1944]. 40 As Polanyi put it: ‘The road to free markets was opened and kept open by an enormous increase in continuous, centrally organized and controlled interventionism … Administrators had to be constantly on the watch to ensure the free working of the system.’ Ibid, p. 144. 41 R. R. Nelson and S. G. Winter, An Evolutionary Theory of Economic Change, Cambridge, MA, Harvard University Press, 2009. 42 W. Lazonick and M. O’Sullivan, ‘Maximizing shareholder value: a new ideology for corporate governance’, Economy and Society, vol. 29, no. 1, 2000, pp. 13–35. 43 W. Hutton, How Good We Can Be: Ending the Mercenary Society and Building a Great Country, London, Abacus, 2015. 44 Lawrence Summers, October 1991, when Chief Economist at the World Bank; cited by M. Ellman, ‘Transition economies’, in H.-J. Chang, ed., Rethinking Development Economics, London and New York, Anthem Press, 2003, pp. 179–98 (p. 197). 45 P.

The Age of Turbulence: Adventures in a New World (Hardback) - Common by Alan Greenspan

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air freight, airline deregulation, Albert Einstein, asset-backed security, bank run, Berlin Wall, Bretton Woods, business process, call centre, capital controls, central bank independence, collateralized debt obligation, collective bargaining, conceptual framework, Corn Laws, corporate governance, corporate raider, correlation coefficient, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cuban missile crisis, currency peg, Deng Xiaoping, Dissolution of the Soviet Union, Doha Development Round, double entry bookkeeping, equity premium, everywhere but in the productivity statistics, Fall of the Berlin Wall, fiat currency, financial innovation, financial intermediation, full employment, Gini coefficient, Hernando de Soto, income inequality, income per capita, invisible hand, Joseph Schumpeter, labor-force participation, labour market flexibility, laissez-faire capitalism, land reform, Long Term Capital Management, Mahatma Gandhi, manufacturing employment, market bubble, means of production, Mikhail Gorbachev, moral hazard, mortgage debt, Myron Scholes, new economy, North Sea oil, oil shock, open economy, Pearl River Delta, pets.com, Potemkin village, price mechanism, price stability, Productivity paradox, profit maximization, purchasing power parity, random walk, reserve currency, Right to Buy, risk tolerance, Ronald Reagan, shareholder value, short selling, Silicon Valley, special economic zone, the payments system, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, total factor productivity, trade liberalization, trade route, transaction costs, transcontinental railway, urban renewal, working-age population, Y2K, zero-sum game

Only rarely was the management of reasonably profitable corporations challenged. Imperceptibly corporate governance moved from shareholder control to control by the CEO. Aside from the outspoken concern of a few academics, the change occurred quietly and largely by default. As shareholders became ever less engaged, the CEOs began to recommend slates of directors to shareholders, who were soon rubber-stamping 424 More ebooks visit: http://www.ccebook.cn ccebook-orginal english ebooks This file was collected by ccebook.cn form the internet, the author keeps the copyright. CORPORATE GOVERNANCE them. Periodically this paradigm went astray when a company or its management got into trouble. But such episodes were relatively rare. Democratic corporate governance had morphed into a type of authoritarianism. The CEO would enter the boardroom, explain the corporation's new capital investment program, and turn to his chief financial officer for corroboration.

The public, already suspicious of business ethics (if it doesn't consider the term an outright oxymoron), was not, I feared, prepared to accept revelations undercutting widely held beliefs about the way corporations were governed. Much of the corporate governance practices of myth have long since been displaced by the imperatives of a modern economy. Throughout the nineteenth and early twentieth centuries, shareholders, in many instances controlling shareholders, actively participated in governing U.S. corporations. They appointed the board of directors, who in turn hired the CEO and other officers and, in general, controlled the strategies of the company. Corporate governance had the trappings of democratic representative government. But ownership diffused over the following generations, and the managerial and entrepreneurial skills of company founders were not always inherited by their offspring.

Despite its all too obvious shortcomings, U.S. corporate governance over the past century must have had something to recommend it. For were it otherwise, the U.S. economy could hardly have risen to its current state of world economic leadership. There can be no doubt that American corporate business has been highly productive and profitable. It has been at the cutting edge of much of the past century's technology. This, along with my observations of a quarter century of board experience, has led me to *In any event, Paul O'Neill was about to retire and t u r n over t h e reins to Alain Belda. 428 More ebooks visit: http://www.ccebook.cn ccebook-orginal english ebooks This file was collected by ccebook.cn form the internet, the author keeps the copyright. CORPORATE GOVERNANCE conclude, however reluctantly that if owners are no longer the managers, CEO control and the authoritarianism it breeds are probably the only way to run an enterprise successfully There do not appear to be credible alternatives to placing the power of governance in the hands of the CEO and trusting that even his handpicked directors will hold him to task, or, if they prove unable or unwilling, that corporate raiders will take over and revamp management.


pages: 504 words: 126,835

The Innovation Illusion: How So Little Is Created by So Many Working So Hard by Fredrik Erixon, Bjorn Weigel

Airbnb, Albert Einstein, asset allocation, autonomous vehicles, barriers to entry, Basel III, Bernie Madoff, bitcoin, Black Swan, blockchain, BRICs, Burning Man, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, Clayton Christensen, Colonization of Mars, commoditize, corporate governance, corporate social responsibility, creative destruction, crony capitalism, dark matter, David Graeber, David Ricardo: comparative advantage, discounted cash flows, distributed ledger, Donald Trump, Elon Musk, Erik Brynjolfsson, fear of failure, first square of the chessboard / second half of the chessboard, Francis Fukuyama: the end of history, George Gilder, global supply chain, global value chain, Google Glasses, Google X / Alphabet X, Gordon Gekko, high net worth, hiring and firing, Hyman Minsky, income inequality, income per capita, index fund, industrial robot, Internet of things, Jeff Bezos, job automation, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, joint-stock company, Joseph Schumpeter, Just-in-time delivery, Kevin Kelly, knowledge economy, labour market flexibility, laissez-faire capitalism, lump of labour, Lyft, manufacturing employment, Mark Zuckerberg, market design, Martin Wolf, mass affluent, means of production, Mont Pelerin Society, Network effects, new economy, offshore financial centre, pensions crisis, Peter Thiel, Potemkin village, price mechanism, principal–agent problem, Productivity paradox, QWERTY keyboard, RAND corporation, Ray Kurzweil, rent-seeking, risk tolerance, risk/return, Robert Gordon, Ronald Coase, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, Silicon Valley, Silicon Valley startup, Skype, sovereign wealth fund, Steve Ballmer, Steve Jobs, Steve Wozniak, technological singularity, telemarketer, The Chicago School, The Future of Employment, The Nature of the Firm, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, transaction costs, transportation-network company, tulip mania, Tyler Cowen: Great Stagnation, University of East Anglia, unpaid internship, Vanguard fund, Yogi Berra

International Institute for Management Development, 2013. IMF, “Adjusting to Lower Commodity Prices.” World Economic Outlook. International Monetary Fund, Oct. 2015. At http://www.imf.org/external/pubs/ft/weo/2015/02/pdf/text.pdf. IMF, “German-Central European Supply Chain – Cluster Report.” IMF Country Report No. 13/263. International Monetary Fund, Aug. 2013. Isaksson, Mats, and Serdar Çelik, “Who Cares? Corporate Governance in Today’s Equity Markets.” OECD Corporate Governance Working Paper No. 8. Organisation for Economic Co-operation and Development, Apr. 2013. At http://dx.doi.org/10.1787/5k47zw5kdnmp-en. Iwamoto, Masaaki, “Abandoned Homes Haunt Japanese Neighborhoods.” Bloomberg.com, July 10, 2015. At http://www.bloomberg.com/news/articles/2015-07-09/abandoned-homes-haunt-japanese-neighborhoods. Jaffe, Adam B., and Manuel Trajtenberg, Patents, Citations and Innovations: A Window on the Knowledge Economy.

In this book, we draw heavily on a vast amount of excellent research in economics, business administration, and public policy. While our own research for this book has spanned more areas than we first imagined, we have often found that we have been drawn to some special communities of scholars. The work by Luigi Zingales, Raghuram Rajan, Chad Syversen, and their colleagues at the University of Chicago Booth School of Business, has been a source of knowledge and inspiration, especially their research on finance, corporate governance, and productivity. Edmund Phelps and his colleagues at Columbia University’s Center on Capitalism and Society have provided us with thought-provoking research and opinions in the territory of economics and culture. Scholars at the George Mason University and its Mercatus Center have produced a vast reservoir of economic analyses of regulation. The McKinsey Global Institute and the Boston Consulting Group have business thinkers who inspired us with insights into business administration and corporate value creation.

There are few roads to understanding business and the economy that do not stop by Karl Marx, Joseph Schumpeter, and Friedrich Hayek. One can dispute their politics, but their insights into the economy are instructive for a contemporary student in that field. Similarly, when we have reread works by scholars like John Kenneth Galbraith, Alexander Gerschenkron, and Susan Strange, to name just three, we have been struck by their insights. Much of the recent literature on corporate governance, business development, and strategy that we have read has felt like a copy of the original thought derived from the works of Peter Drucker, Michael Porter, Henry Minzberg, Philip Kotler, and Igor Ansoff. There are several thinkers today that can be put in the same category. If you get bored by all those who just repeat the conventional wisdom about the economy and how it evolves, pick any work from these economic thinkers and you will immediately be reinvigorated: David Autor, Tyler Cowen, Deirdre McCloskey, Malcolm Gladwell, David Graeber, Deepak Lal, Joel Mokyr, Matt Ridley, Richard Sennett, Robert Solow, Lawrence Summers, Peter Thiel, and Martin Wolf.


pages: 219 words: 15,438

The Essays of Warren Buffett: Lessons for Corporate America by Warren E. Buffett, Lawrence A. Cunningham

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compound rate of return, corporate governance, Dissolution of the Soviet Union, diversified portfolio, dividend-yielding stocks, fixed income, George Santayana, index fund, intangible asset, invisible hand, large denomination, low cost carrier, oil shock, passive investing, price stability, Ronald Reagan, the market place, transaction costs, Yogi Berra, zero-coupon bond

Buffett Chairman and CEO Berkshire Hathaway Inc. Selected, Arranged, and Introduced by Lawrence A. Cunningham Professor of Law Director, The Samuel and Ronnie Heyman Center on Corporate Governance Benjamin N. Cardozo School of Law Yeshiva University © 1997; 1998 Lawrence A. Cunningham All Rights Reserved Includes Previously Copyrighted Material Reprinted with Permission TABLE OF CONTENTS INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 PROLOGUE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 I. CORPORATE GOVERNANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . A. B. C. D. E. II. I. COMMON STOCK. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..

At our annual meetings, someone usually asks "What happens to this place if you get hit by a truck?" I'm glad they are still asking the question in this form. It won't be too long before the query becomes: "What happens to this place if you don't get hit by a truck?" Such questions, in any event, raise a reason for me to discuss corporate governance, a hot topic during the past year. In general, I believe that directors have stiffened their spines recently and that shareholders are now being treated somewhat more like true owners than was the case not long ago. Commentators on corporate governance, however, seldom make any distinction among three fundamentally different manager/owner situations that exist in publicly-held companies. Though the legal responsibility of directors is identical throughout, their ability to effect change differs in each of the cases.

But he notes that he benefited enormously from Graham's intellectual generosity and believes it is appropriate that he pass the wisdom on, even if that means creating investment competitors. To that end, my most important role has been to organize the essays around the themes reflected in this collection. This introduction to the major themes encapsulates the basics and locates them in the context of current thinking. The essays follow. CORPORATE GOVERNANCE For Buffett, managers are stewards of shareholder capital. The best managers think like owners in making business decisions. 8 CARDOZO LAW REVIEW [Vol. 19:1 They have shareholder interests at heart. But even first-rate managers will sometimes have interests that conflict with those of shareholders. How to ease those conflicts and to nurture managerial stewardship have been constant objectives of Buffett's fortyyear career and a prominent theme of his essays.


pages: 493 words: 139,845

Women Leaders at Work: Untold Tales of Women Achieving Their Ambitions by Elizabeth Ghaffari

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Albert Einstein, AltaVista, business process, cloud computing, Columbine, corporate governance, corporate social responsibility, dark matter, family office, Fellow of the Royal Society, financial independence, follow your passion, glass ceiling, Grace Hopper, high net worth, knowledge worker, Long Term Capital Management, performance metric, pink-collar, profit maximization, profit motive, recommendation engine, Ronald Reagan, shareholder value, Silicon Valley, Silicon Valley startup, Steve Ballmer, Steve Jobs, thinkpad, trickle-down economics, urban planning, women in the workforce, young professional

So, I was sure that it was a really good thing I didn't move down to the US because I didn't believe there was any way that I was going to last six months. Interestingly—and luckily—enough, the first big assignment they asked me to do at the start of 1998 was to manage some research into corporate governance. PW had won a contract to research and write a corporate governance book. At that time, Canada had some of the leading governance standards in the world, with the Dey Report.1 So the partners thought I would be perfect to undertake this international governance research project. In the end, we produced two books, Corporate Governance and the Board—What Works Best and the second edition of Audit Committee Effectiveness—What Works Best. We issued both books in 2000. Unexpectedly, governance became my primary focus, and it was absolute serendipity, as I have stayed in governance ever since.

Then I had to apply for a green card or not work in the US any longer. That was not palatable because I really love working in the US—once I adapted to the different business culture. We moved to New Jersey at the start of 1995. ___________________ 1 The Dey Report, also known as The Toronto Report, is a study of Canadian corporate governance. It is completed by the Toronto Stock Exchange (TSX) committee, chaired by Peter Dey. The report contains fourteen recommendations to assist TSX-listed companies in their approach to corporate governance. Quite honestly, once I became more of an expert in governance, then I did have something original to say and contribute—something that other people weren't saying in meetings. So I became a lot more confident and comfortable with my contributions. Today, I'm based in the Center for Board Governance, which is housed in PwC's2 national office.

Also, there were new rules from the New York Stock Exchange and NASDAQ that had a fundamental and transformational impact on boards of directors. As a result, there was a stronger case for me to make partner, focusing on corporate governance. In our firm, we don't view partnership as a promotion following a period of excellent service. Instead, it's an admission to the partnership. There needs to be a carefully articulated business case as to why someone should be a partner, what value they bring to the firm, and why they need to be a partner to bring that value forward. When I made partner, I made it with a corporate governance business case, which was unique. In many ways, I'm a bit of an unusual creature in that much of my business case related to enhancing PwC's thought leadership around governance, as well as building and improving high-value relationships with boards of directors and audit committees.

The Corporation: The Pathological Pursuit of Profit and Power by Joel Bakan

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Berlin Wall, Cass Sunstein, corporate governance, corporate personhood, corporate social responsibility, creative destruction, energy security, Exxon Valdez, IBM and the Holocaust, joint-stock company, laissez-faire capitalism, market fundamentalism, Naomi Klein, new economy, race to the bottom, Ralph Nader, Ronald Reagan, shareholder value, South Sea Bubble, The Wealth of Nations by Adam Smith, Triangle Shirtwaist Factory, urban sprawl

We have over the last three hundred years constructed a remarkably efficient wealth-creating machine, but it is now out of control. Though solutions to this problem must ultimately be democratically fashioned by "the people," not by a law professor sitting in front of his computer, I do want to conclude with some general thoughts about how we might move forward. To begin with, tinkering with corporate governance is not enough. Though post-Enron proposals for the reform of corporate governance and measures such as those found in the Sarbanes-Oxley Act are likely to strengthen managers and directors' accountability to investors, they will do little to improve corporate accountability to society as a whole. Broader reforms, such as tighter restrictions on acquisitions and mergers , representation of stakeholders (union representatives, for example) on boards of directors, and laws that permit or require executives to consider stakeholder interests in their business decisions (so-called constituency statutes), though desirable, are unlikely to strengthen corporations ' accountability to society in significant ways.

Even modest reforms-such as, for example, a law requiring companies to list employee stock options as expenses in their financial reports, which might avoid the kind of misleadingly rosy financial statements that have fueled recent scandals '-seem unlikely from a U.S. federal government that has failed to match its strong words at the time of the scandals with equally strong actions. Though the Sarbanes-Oxley Act, signed into law in 2002 to redress some of the more blatant problems of corporate governance and accounting, provides welcome remedies, at least on paper,' the federal government's general response to corporate scandals has been sluggish and timid at best. What is revealed by comparing that response to the English Parliament's swift and draconian measures of 1720 is the fact that, over the last three hundred years, corporations have amassed such great power as to weaken government 's ability to control them.

Business-government relations have undergone profound changes since the early 1970s"-a time when, as Niskanen describes it, only "relatively few corporations had much of a public role in federal politics . . . [and] most corporations did not have offices in Washington, did not have lobbyists here."32 Today, all major corporations have offices in the nation's capital, as do the numerous industry groups, think tanks, and lobby organizations that represent their collective interests. Another significant change in corporate-government relations since the 1970s has been the expanded role and influence of corporate donations within the electoral system. In the mid-1970s the Supreme Court extended First Amendment constitutional protection to corporate financing of elections, a decision that opened the door to corporations' near-complete takeover of the electoral process." The logic of corporate election financing is clear.


pages: 172 words: 54,066

The End of Loser Liberalism: Making Markets Progressive by Dean Baker

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Asian financial crisis, banking crisis, Bernie Sanders, collateralized debt obligation, collective bargaining, corporate governance, currency manipulation / currency intervention, Doha Development Round, financial innovation, full employment, Home mortgage interest deduction, income inequality, inflation targeting, invisible hand, manufacturing employment, market clearing, market fundamentalism, medical residency, patent troll, pets.com, pirate software, price stability, quantitative easing, regulatory arbitrage, rent-seeking, Robert Shiller, Robert Shiller, Silicon Valley, too big to fail, transaction costs

Many large manufacturers were pushed to the edge of bankruptcy or beyond in the mid-1980s, the first period of major dollar overvaluation. Millions of manufacturing jobs disappeared in the late 1990s and 2000s, even before the recession, as a result of a second surge in the value of the dollar starting in 1997. This has all had the effect of weakening unions – once heavily concentrated in manufacturing – and putting downward pressure on wages in major sectors such as the auto and steel industry. Corporate governance The rules on corporate governance also play an important role in the upward redistribution of income. As the practice stands now, the top management of major corporations is in a position to pick the board of directors, who then decide the salaries of top management. To ensure that directors will be loyal, they are offered annual compensation in the hundreds of thousands of dollars to attend four to eight meetings a year.

This tax would not be as well-targeted on wasteful speculative trades as a transactions-based speculation tax, but its ease of implementation means that a progressive legislature in any state could tap a major new source of revenue at the expense of the financial sector. It is unfortunate that the tax will also hit ordinary transactions by average people, but it’s hard to see why it is okay (in many states) to tax food but not to tax checking account fees or credit card penalties. Corporate governance, the much-overlooked cesspool It is remarkable that conservatives, who are inherently suspicious of governmental institutions, tend to pay little attention to the structure of corporate governance. Just as governments at all levels offer the opportunity for corruption, so do corporations. The big difference is that corporate managers – unlike their counterparts in government – operate largely in secret, control many of the rules under which they are re-elected, and make payoffs (in the form of directors’ fees) to the people who determine their salaries.

After the executives drove their companies to bankruptcy, shareholders were left with little or nothing while the CEOs walked away with fortunes.[96] It is not difficult to structure contracts so that incentives are aligned more closely with the long-term performance of the stock and so that top management doesn’t do well unless the shareholders do well. (We may be concerned about corporate stakeholders other than shareholders as well, but it would be a big step forward to have a pay structure that at least protected shareholders.) But the boards that set pay are working for the CEOs, not the shareholders, and so outsized pay packages are likely to persist unless there are major changes in the rules of corporate governance.[97] The outlandish CEO pay packages of today are a relatively new development. While CEOs have always been well paid, the ratio of executive compensation to the average worker’s pay was in the range of 25 or 30 to 1 as recently as the 1970s, which would put CEO compensation in the area of $1.5-$2.0 million. By contrast, multiples of 200 or 300 to 1 are the norm today. One would be hard-pressed to argue that CEOs as a group are doing a better job now than in the 1950s and 1960s, when the country enjoyed its most rapid rate of productivity growth.


pages: 580 words: 168,476

The Price of Inequality: How Today's Divided Society Endangers Our Future by Joseph E. Stiglitz

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affirmative action, Affordable Care Act / Obamacare, airline deregulation, Andrei Shleifer, banking crisis, barriers to entry, Basel III, battle of ideas, Berlin Wall, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collapse of Lehman Brothers, collective bargaining, colonial rule, corporate governance, Credit Default Swap, Daniel Kahneman / Amos Tversky, Dava Sobel, declining real wages, deskilling, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial innovation, Flash crash, framing effect, full employment, George Akerlof, Gini coefficient, income inequality, income per capita, indoor plumbing, inflation targeting, information asymmetry, invisible hand, jobless men, John Harrison: Longitude, John Markoff, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Arrow, Kenneth Rogoff, labour market flexibility, London Interbank Offered Rate, lone genius, low skilled workers, Marc Andreessen, Mark Zuckerberg, market bubble, market fundamentalism, mass incarceration, medical bankruptcy, microcredit, moral hazard, mortgage tax deduction, negative equity, obamacare, offshore financial centre, paper trading, Pareto efficiency, patent troll, Paul Samuelson, payday loans, price stability, profit maximization, profit motive, purchasing power parity, race to the bottom, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, Simon Kuznets, spectrum auction, Steve Jobs, technology bubble, The Chicago School, The Fortune at the Bottom of the Pyramid, The Myth of the Rational Market, The Spirit Level, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, trickle-down economics, ultimatum game, uranium enrichment, very high income, We are the 99%, wealth creators, women in the workforce, zero-sum game

In some circles, so engrained did these schizophrenic attitudes to “fairness” become that early in the Great Recession an Obama administration official could say, with a straight face, that it was necessary to honor AIG bonuses, even for the officials who had led the company to need a $150 billion bailout, because of the sanctity of contracts; minutes later he could admonish autoworkers to accept a revision of their contract that would have lowered their compensation enormously. Different corporate governance laws (even modest ones, like giving shareholders some say in the pay of their CEO)40 might have tamed the unbridled zeal of executives, but the 1 percent didn’t—and still don’t—want such reforms in corporate governance, even if they would make the economy more efficient. And they have used their political muscle to make sure that such reforms don’t occur. The forces we have just described, including weaker unions and weaker social cohesion working with corporate governance laws that give management enormous discretion to run corporations for their own benefit, have led not only to a declining wage share in national income but also to a change in the way our economy responds to an economic downturn.

Competitive forces should also limit disproportionate executive compensation, but in modern corporations, the CEO has enormous power—including the power to set his own compensation, subject, of course, to his board—but in many corporations, he even has considerable power to appoint the board, and with a stacked board, there is little check. Shareholders have minimal say. Some countries have better “corporate governance laws,” the laws that circumscribe the power of the CEO, for instance, by insisting that there be independent members in the board or that shareholders have a say in pay. If the country does not have good corporate governance laws that are effectively enforced, CEOs can pay themselves outsize bonuses. Progressive tax and expenditure policies (which tax the rich more than the poor and provide systems of good social protection) can limit the extent of inequality. By contrast, programs that give away a country’s resources to the rich and well connected can increase inequality.

Macroeconomic policies determine the tightness of the labor market—the level of unemployment, and thus how market forces operate to change the share of workers. If monetary authorities act to keep unemployment high (even if because of fear of inflation), then wages will be restrained. Strong unions have helped to reduce inequality, whereas weaker unions have made it easier for CEOs, sometimes working with market forces that they have helped shape, to increase it. In each arena—the strength of unions, the effectiveness of corporate governance, the conduct of monetary policy—politics is central. Of course, market forces, the balancing of, say, the demand and supply for skilled workers, affected as it is by changes in technology and education, play an important role as well, even if those forces are partially shaped by politics. But instead of these market forces and politics balancing each other out, with the political process dampening the increase in inequality in periods when market forces might have led to growing disparities, instead of government tempering the excesses of the market, in America today the two have been working together to increase income and wealth disparities.


pages: 602 words: 120,848

Winner-Take-All Politics: How Washington Made the Rich Richer-And Turned Its Back on the Middle Class by Paul Pierson, Jacob S. Hacker

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accounting loophole / creative accounting, active measures, affirmative action, asset allocation, barriers to entry, Bonfire of the Vanities, business climate, carried interest, Cass Sunstein, clean water, collective bargaining, corporate governance, Credit Default Swap, David Brooks, desegregation, employer provided health coverage, financial deregulation, financial innovation, financial intermediation, fixed income, full employment, Home mortgage interest deduction, Howard Zinn, income inequality, invisible hand, knowledge economy, laissez-faire capitalism, Martin Wolf, medical bankruptcy, moral hazard, Nate Silver, new economy, night-watchman state, offshore financial centre, oil shock, Powell Memorandum, Ralph Nader, Ronald Reagan, shareholder value, Silicon Valley, The Wealth of Nations by Adam Smith, too big to fail, trickle-down economics, union organizing, very high income, War on Poverty, winner-take-all economy, women in the workforce

Gourevitch and James Shinn, Political Power and Corporate Control: The New Global Politics of Corporate Governance (Princeton: Princeton University Press, 2005). 35 Robert Kuttner, The Squandering of America: How the Failure of Our Politics Undermines Our Prosperity (New York: Knopf, 2007), 78. 36 Jesse Westbrook and David Scheer, “Cox’s SEC Hindered Probes, Slowed Cases, Shrank Fines, GAO Says,” Bloomberg, May 6, 2009. 37 Christine Dugas, “Workers Sue over 401k Losses,” USA Today, August 20, 2001; Albert B. Crershow, “A 401(k) Post Mortem: After Enron, Emphasis on Company Stock Draws Scrutiny,” Washington Post, December 16, 2001, H1. 38 John W. Cioffi, “Building Finance Capitalism: The Regulatory Politics of Corporate Governance Reform in the United States and Germany,” in Jonah Levy, ed., The State after Statism: New State Activities in the Age of Liberalization (Oxford: Oxford University Press, 2006), 185–229. 39 Ibid. 40 Ibid. 41 CBS News, “Bush and Gore Do New York,” October 18, 2000, available at http://www.cbsnews.com/stories/2000/10/18/politics/main 242210.shtml.

The third problem with the skeptical response goes even deeper: The skeptics suggest that the only way government can change the distribution of income is through taxation and government benefits. This is a common view, yet also an extraordinarily blinkered one. Government actually has enormous power to affect the distribution of “market income,” that is, earnings before government taxes and benefits take effect. Think about laws governing unions; the minimum wage; regulations of corporate governance; rules for financial markets, including the management of risk for high-stakes economic ventures; and so on. Government rules make the market, and they powerfully shape how, and in whose interests, it operates. This is a fact, not a statement of ideology. And it is a fact that carries very big implications. Perhaps the biggest implication is that public policy really matters. The rules of the market make a huge difference for people’s lives.

In that year, the average CEO of the 350 largest publicly traded companies made more than $12 million per year.41 Once again, the standard story is that top executives earn what they earn because they are so much more valuable to companies than they once were. Government has been a bystander as market forces have benignly played out. Once again, however, the standard story is wrong. Executive pay is set in a distorted market deeply shaped by public policy. CEOs have been able to take advantage of a corporate governance system that allows them to drive up their own pay, creates ripe conditions for imbalanced bidding wars in which executives hold the cards, and prevents all but the most privileged insiders from understanding what is actually going on. These arrangements are no accident. Over the last generation—through both changes in public policy and the failure to update government regulations to reflect changing realities—political leaders have promoted a system of executive compensation that grants enormous autonomy to managers, including significant indirect control over their own pay.


pages: 515 words: 126,820

Blockchain Revolution: How the Technology Behind Bitcoin Is Changing Money, Business, and the World by Don Tapscott, Alex Tapscott

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Airbnb, altcoin, asset-backed security, autonomous vehicles, barriers to entry, bitcoin, blockchain, Bretton Woods, business process, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, clean water, cloud computing, cognitive dissonance, commoditize, corporate governance, corporate social responsibility, creative destruction, Credit Default Swap, crowdsourcing, cryptocurrency, disintermediation, distributed ledger, Donald Trump, double entry bookkeeping, Edward Snowden, Elon Musk, Erik Brynjolfsson, ethereum blockchain, failed state, fiat currency, financial innovation, Firefox, first square of the chessboard, first square of the chessboard / second half of the chessboard, future of work, Galaxy Zoo, George Gilder, glass ceiling, Google bus, Hernando de Soto, income inequality, informal economy, information asymmetry, intangible asset, interest rate swap, Internet of things, Jeff Bezos, jimmy wales, Kickstarter, knowledge worker, Kodak vs Instagram, Lean Startup, litecoin, Lyft, M-Pesa, Marc Andreessen, Mark Zuckerberg, Marshall McLuhan, means of production, microcredit, mobile money, money market fund, Network effects, new economy, Oculus Rift, off grid, pattern recognition, peer-to-peer, peer-to-peer lending, peer-to-peer model, performance metric, Peter Thiel, planetary scale, Ponzi scheme, prediction markets, price mechanism, Productivity paradox, QR code, quantitative easing, ransomware, Ray Kurzweil, renewable energy credits, rent-seeking, ride hailing / ride sharing, Ronald Coase, Ronald Reagan, Satoshi Nakamoto, Second Machine Age, seigniorage, self-driving car, sharing economy, Silicon Valley, Skype, smart contracts, smart grid, social graph, social software, Stephen Hawking, Steve Jobs, Steve Wozniak, Stewart Brand, supply-chain management, TaskRabbit, The Fortune at the Bottom of the Pyramid, The Nature of the Firm, The Wisdom of Crowds, transaction costs, Turing complete, Turing test, Uber and Lyft, unbanked and underbanked, underbanked, unorthodox policies, wealth creators, X Prize, Y2K, Zipcar

He said, “The first public company with this system in place will see a significant price per share advantage, or price to earnings ratio advantage, over other companies where investors have to anxiously await the dribble of financial information that they are provided quarterly.” After all, he argues, “Who is going to invest in a company that shows you what’s going on quarterly, compared to one that shows you what’s going on all the time?”67 Will investors demand triple-entry accounting to meet corporate governance standards? It’s not a far-fetched question. Many institutional investors, such as the California Public Employees’ Retirement System, have developed strict corporate governance standards, and will not invest in a company unless those standards are met.68 Triple-entry accounting could be next. Triple-Entry Accounting: Privacy Is for Individuals, Not Corporations Triple-entry accounting is not without skeptics. Izabella Kaminska, a Financial Times reporter, believes mandating triple-entry accounting will lead to an increasing number of transactions moving off balance sheets.

Inclusion Designing the Future PART II: Transformations CHAPTER 3: Reinventing Financial Services A New Look for the World’s Second-Oldest Profession The Golden Eight: How the Financial Services Sector Will Change From Stock Exchanges to Block Exchanges Dr. Faust’s Blockchain Bargain The Bank App: Who Will Win in Retail Banking Google Translate for Business: New Frameworks for Accounting and Corporate Governance Reputation: You Are Your Credit Score The Blockchain IPO The Market for Prediction Markets Road Map for the Golden Eight CHAPTER 4: Re-architecting the Firm: The Core and the Edges Building ConsenSys Changing the Boundaries of the Firm Determining Corporate Boundaries CHAPTER 5: New Business Models: Making It Rain on the Blockchain bAirbnb Versus Airbnb Global Computing: The Rise of Distributed Applications The DApp Kings: Distributed Business Entities Autonomous Agents Distributed Autonomous Enterprises The Big Seven: Open Networked Enterprise Business Models Hacking Your Future: Business Model Innovation CHAPTER 6: The Ledger of Things: Animating the Physical World Power to the People The Evolution of Computing: From Mainframes to Smart Pills The Internet of Things Needs a Ledger of Things The Twelve Disruptions: Animating Things The Economic Payoff The Future: From Uber to SUber Hacking Your Future for a World of Smart Things CHAPTER 7: Solving the Prosperity Paradox: Economic Inclusion and Entrepreneurship A Pig Is Not a Piggy Bank The New Prosperity Paradox Road Map to Prosperity Remittances: The Story of Analie Domingo Blockchain Humanitarian Aid Safe as Houses?

Insuring Value and Managing Risk—protect assets, homes, lives, health, business property, and business practices, derivative products Using reputational systems, insurers will better estimate actuarial risk, creating decentralized markets for insurance. More transparent derivatives Insurance, risk management, wholesale banking, brokerage, clearinghouses, regulators 8. Accounting for Value—new corporate governance Distributed ledger will make audit and financial reporting real time, responsive, and transparent, will dramatically improve capacity of regulators to scrutinize financial actions within a corporation Audit, asset management, shareholder watchdogs, regulators blockchain would transform her business as the Internet transformed other industries: “I would take it about as seriously as you should have taken the concept of the Internet in the 1990s.


pages: 264 words: 115,489

Take the money and run: sovereign wealth funds and the demise of American prosperity by Eric Curt Anderson

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asset allocation, banking crisis, Bretton Woods, business continuity plan, business intelligence, business process, collective bargaining, corporate governance, credit crunch, currency manipulation / currency intervention, currency peg, diversified portfolio, fixed income, floating exchange rates, housing crisis, index fund, Kenneth Rogoff, open economy, passive investing, profit maximization, profit motive, random walk, reserve currency, risk tolerance, risk-adjusted returns, risk/return, Ronald Reagan, sovereign wealth fund, the market place, The Wealth of Nations by Adam Smith, too big to fail, Vanguard fund

. • Anticorruption • Principle 10: Businesses should work against corruption in all its forms, including extortion and bribery. 93. The OECD Principles of Corporate Governance were endorsed by OECD Ministers in 1999 and have since become an international benchmark for policy makers, investors, corporations, and other stakeholders worldwide. They have advanced the corporate governance agenda and provided specific guidance for legislative and regulatory initiatives in both OECD and non-OECD countries. According to the OECD, the principles are based upon the following premises: 232 Notes • The corporate governance framework should promote transparent and efficient markets, be consistent with the rule of law and clearly articulate the division of responsibilities among different supervisory, regulatory, and enforcement authorities. • The corporate governance framework should protect and facilitate the exercise of shareholders’ rights. • The corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders.

. • The corporate governance framework should protect and facilitate the exercise of shareholders’ rights. • The corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights. • The corporate governance framework should recognize the rights of stakeholders established by law or through mutual agreements and encourage active cooperation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises. • The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company. • The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders. 94.

“Therefore,” he continued, “we must have a certain level of income from our investments and [they] must have a certain liquidity.”96 How to accomplish this objective? Lou contended his fund would seek to primarily invest in financial instruments like indexed listings. Lou, however, seems to have slipped on the “benign intent” message, as he told the assembled financial analysts that CIC hoped to help improve corporate governance at firms receiving Chinese funding.97 So much for the promise of passive investment. In the meantime, U.S. and international demands for Chinese investment transparency had come under attack. In a publication issued by the Jamestown Foundation—a nonpartisan think tank with the self-declared mission of informing and educating policy makers—Wenran Jiang, acting director of the China Institute at the University of Alberta, wrote: If Washington is comfortable having Beijing buy up $400 billion of its treasury bonds to subsidize President Bush’s deficit spending economic policy, it needs to answer the question of why it should be so alarmed about Chinese investments in the form of sovereign wealth funds—both are in the nature to seek returns for the money.98 A comparable message was issued by the Heritage Foundation.


pages: 413 words: 117,782

What Happened to Goldman Sachs: An Insider's Story of Organizational Drift and Its Unintended Consequences by Steven G. Mandis

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activist fund / activist shareholder / activist investor, algorithmic trading, Berlin Wall, bonus culture, BRICs, business process, collapse of Lehman Brothers, collateralized debt obligation, commoditize, complexity theory, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, disintermediation, diversification, Emanuel Derman, financial innovation, fixed income, friendly fire, Goldman Sachs: Vampire Squid, high net worth, housing crisis, London Whale, Long Term Capital Management, merger arbitrage, Myron Scholes, new economy, passive investing, performance metric, risk tolerance, Ronald Reagan, Saturday Night Live, Satyajit Das, shareholder value, short selling, sovereign wealth fund, The Nature of the Firm, too big to fail, value at risk

Appendix E Goldman’s History of Commitment to Public Service Figures E-1 and E-2 highlight key milestones demonstrating Goldman’s long-standing commitment to public service and corporate citizenship.1 FIGURE E-1 Goldman document listing its commitment to public service Source: Goldman Sachs, www.goldmansachs.com/investor-relations/corporate-governance/corporate-governance-documents/culture.pdf. FIGURE E-2 Goldman document showing a timeline of public service projects Source: Goldman Sachs, www.goldmansachs.com/investor-relations/corporate-governance/corporate-governance-documents/culture.pdf. Appendix F Key Goldman People Following is a list of key Goldman people who are mentioned in this book: the Weinbergs and others who formerly ran the firm, those currently running the firm, and other former executives. Individuals are categorized by role or position and alphabetized within those categories.

Goldman hired people who were accustomed to excelling, who had done so all their lives—in the classroom, on the playing field, in almost any endeavor they attempted. No one was used to failing. 41. Cohan, Money and Power, 225. 42. Ellis, The Partnership, 187. 43. Harper and Choudhury, “Sidney Weinberg.” 44. In Gatekeepers: The Professions and Corporate Governance (Oxford, UK: Oxford University Press, 2006, 2, 3), John Coffee studied the role played by gatekeepers in corporate governance in acting as “a reputational intermediary to assure investors as to the quality of the ‘signal’ sent by the corporate issuer.” Gatekeepers include securities analysts, auditors, attorneys, investment bankers, credit rating agencies, and so on. He describes how reputational capital “can be placed at risk by the gatekeeper’s vouching for its client’s assertions or projections.” 45.

I should have asked why we didn’t speak to the client about approaching the buyer in that way. 58. I worked closely with partners and senior partners, and it was a relatively flat organization, so I doubt that the behavior or culture was much different at other levels. My interviews with partners, clients, and competitors, along with news articles at the time, support that view. Chapter 3 1. http://www.goldmansachs.com/investor-relations/corporate-governance/corporate-governance-documents/culture.pdf. 2. Interdependence exists within an organization when the actors are tied together in a meaningful manner. In Goldman’s case, there was financial interdependence among partners, who shared in one another’s profits and losses, trading risks, and reputation risks. Each partner depended on the others to make money and to work to benefit the group as a whole.


pages: 91 words: 26,009

Capitalism: A Ghost Story by Arundhati Roy

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activist fund / activist shareholder / activist investor, Bretton Woods, corporate governance, feminist movement, Frank Gehry, ghettoisation, Howard Zinn, informal economy, land reform, Mahatma Gandhi, means of production, megacity, microcredit, neoliberal agenda, Occupy movement, RAND corporation, reserve currency, special economic zone, spectrum auction, stem cell, The Chicago School, Washington Consensus, WikiLeaks

Oprah came.31 She said she loved India, that she would come again and again. It made us proud. This is only the burlesque end of the Exquisite Art. Though the Tatas have been involved with corporate philanthropy for almost a hundred years now, endowing scholarships and running some excellent educational institutes and hospitals, Indian corporations have only recently been invited into the Star Chamber, the Camera stellata, the brightly lit world of global corporate government, deadly for its adversaries but otherwise so artful that you barely know it’s there. What follows in this essay might appear to some to be a somewhat harsh critique. On the other hand, in the tradition of honoring one’s adversaries, it could be read as an acknowledgment of the vision, flexibility, sophistication, and unwavering determination of those who have dedicated their lives to keeping the world safe for capitalism.

35 Over the years, as people witnessed some of the genuinely good work the foundations did (running public libraries, eradicating diseases)—the direct connection between corporations and the foundations they endowed began to blur. Eventually, it faded altogether. Now even those who consider themselves left wing are not shy to accept their largesse. By the 1920s US capitalism had begun to look outward for raw materials and overseas markets. Foundations began to formulate the idea of global corporate governance. In 1924 the Rockefeller and Carnegie Foundations jointly created what is today the most powerful foreign policy pressure group in the world—the Council on Foreign Relations (CFR), which later came to be funded by the Ford Foundation as well. By 1947 the newly created CIA was supported by and working closely with the CFR. Over the years the CFR’s membership has included twenty-two US secretaries of state.

The World Bank issued a 2007 assessment from Washington saying the movement would “dovetail” with its “good governance” strategy.47 (In 2008 Anna Hazare received a World Bank Award for Outstanding Public Service.)48 Like all good Imperialists, the Philanthropoids set themselves the task of creating and training an international cadre that believed that Capitalism, and by extension the hegemony of the United States, was in their own self-interest. And who would therefore help to administer the Global Corporate Government in the ways native elites had always served colonialism. So began the foundations’ foray into education and the arts, which would become their third sphere of influence, after foreign and domestic economic policy. They spent (and continue to spend) millions of dollars on academic institutions and pedagogy. Joan Roelofs, in her wonderful book Foundations and Public Policy: The Mask of Pluralism, describes how foundations remodeled the old ideas of how to teach political science and fashioned the disciplines of “international” and “area” studies.


pages: 274 words: 66,721

Double Entry: How the Merchants of Venice Shaped the Modern World - and How Their Invention Could Make or Break the Planet by Jane Gleeson-White

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Affordable Care Act / Obamacare, Bernie Madoff, Black Swan, British Empire, carbon footprint, corporate governance, credit crunch, double entry bookkeeping, full employment, Gordon Gekko, income inequality, invention of movable type, invention of writing, Islamic Golden Age, Johann Wolfgang von Goethe, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, means of production, Naomi Klein, Ponzi scheme, shareholder value, Silicon Valley, Simon Kuznets, source of truth, spice trade, spinning jenny, The Wealth of Nations by Adam Smith, Thomas Malthus, trade route, traveling salesman, upwardly mobile

The ‘audit expectations gap’ refers to the discrepancy between the common but wrong public belief that auditors guarantee the rectitude of accounts, that they thoroughly check every detail of corporate accounts and certify them, and the reality, that in fact auditors are required merely to check the accounts enough to assure themselves they are okay. Auditors express an opinion only; they guarantee nothing. The other problem is with company directors being charged with corporate governance—which means they must oversee the accounting of their own firms. Ross says that cases like that of ABC Learning raise questions about how able directors are to carry out their corporate governance roles, given the complexity of contemporary business structures and operations, and the range of accounting approaches it is possible to adopt. He argues that ‘what it comes down to is accounting policy choice and this is where you can get differences in interpretation’. Perhaps after all there is not such a vast chasm separating the astrological mathematics of Pacioli’s day from the mathematics of contemporary accounting practice.

Although Enron’s accounting practice was arguably no more devious than that of many of its contemporaries, it was ‘the straw that broke the corporate camel’s back’—Enron was possibly too big and allegedly too well connected with Congress and the Bush administration to ignore. Its collapse, followed so soon by WorldCom’s and several other accounting scandals, led to the US Sarbanes-Oxley Act of 2002 which introduced major changes to the regulation of financial practice and corporate governance, as well as a public company accounting oversight board to oversee the auditors of public companies. Section 1102 of the Act outlines fines and prison terms for those who tamper with the transactional records of a firm. Enron’s chief operating officer Jeffrey K. Skilling was sentenced to 24 years under its terms. The company’s auditor Arthur Andersen admitted to shredding Enron working papers and was liquidated in 2003.

Australia committed to the international financial reporting standards (IFRS) in a 2005 Australian version—although according to a KPMG survey of Australian insurance companies, two-thirds of the respondents believed this commitment would increase the risk of inaccuracy in financial reporting. The US Securities and Exchange Commission has not yet committed to IFRS, continuing to require only GAAP standards. But it is believed that in the long term the SEC will also accept IFRS standards. While the post-2000 push for tighter corporate governance might suggest a new era in regulation, arguably these episodes are little more than replays of responses to the many instances of scandalous corporate behaviour that have occurred over the past one hundred and seventy or so years. Current concern about the usefulness of financial statements for revealing corporate wealth and progress is very similar to that expressed a century ago. Former US president George W.


pages: 460 words: 130,053

Red Notice: A True Story of High Finance, Murder, and One Man's Fight for Justice by Bill Browder

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Berlin Wall, British Empire, corporate governance, El Camino Real, Gordon Gekko, half of the world's population has never made a phone call, index card, rolodex, Ronald Reagan, transfer pricing, union organizing

This was a huge problem that every business person in Russia was obsessed with, and because I’d developed a reputation after my fight with Sidanco, in early January 2000 I was invited by the American Chamber of Commerce in Moscow to give a presentation to the local business community about corporate-governance abuse. It seemed as though I was the only person in Moscow crazy enough to speak publicly about the misdeeds of the Russian oligarchs. I decided to use the Yukos oil company as my case study. I could have picked any Russian company, but Yukos was attractive because it had had so many minority-shareholder scandals. I called my presentation “The Armed Forces of Corporate Governance Abuse” to describe the many ways that the oligarchs went about ripping off their minority shareholders. The “Army” was transfer pricing; the “Navy,” asset stripping; and the “Marines,” shareholder dilutions.

She didn’t sound nearly as eager to hear from me as I was to talk to her, but I still succeeded in inviting her to lunch, even if her tone of voice made it clear that she considered it to be a business meal and nothing more. What the hell, I had to start somewhere. At least my foot was in the door. Our lunch took place a week later at a Swedish restaurant called Scandinavia, just behind Tverskaya Street near Pushkin Square. The meeting was slightly uncomfortable because neither of us knew what the other person’s agenda was. I supposed she expected me to talk to her about Russian business, Yukos, and corporate governance, and she was clearly confused when I started asking more personal questions, all of which she artfully declined to answer. By the middle of the meal we both understood that we were operating on different wavelengths, but even so, my persistence began to pay off. She didn’t open up entirely, but by the time the bill came I’d learned that Elena was not merely beautiful but incredibly smart.

She was transformed. Her flaxen hair was no longer tied in a bun but rested softly on her shoulders. Her lipstick was redder than before, and her black dress was simultaneously tighter and classier than anything I’d seen her in before. She wasn’t just beautiful. She was sexy. It was clear that for her, this was really our first date. We sat and had dinner. We didn’t talk about Russian oligarchs or corporate governance or business practices; we just talked about our families and our lives and our aspirations—what everyone talks about when they’re getting to know someone. It was great. Before we said good-bye that night, I grabbed her around the waist and pulled her toward me, and without any resistance we shared our first real kiss. After that we spoke every day, and I would have been happy to see her every day too, but she had time to see me only once a week or even once every two weeks.


pages: 524 words: 143,993

The Shifts and the Shocks: What We've Learned--And Have Still to Learn--From the Financial Crisis by Martin Wolf

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air freight, anti-communist, Asian financial crisis, asset allocation, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Black Swan, bonus culture, break the buck, Bretton Woods, call centre, capital asset pricing model, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collateralized debt obligation, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, deglobalization, Deng Xiaoping, diversification, double entry bookkeeping, en.wikipedia.org, Erik Brynjolfsson, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial deregulation, financial innovation, financial repression, floating exchange rates, forward guidance, Fractional reserve banking, full employment, global rebalancing, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, inflation targeting, information asymmetry, invisible hand, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, light touch regulation, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, mandatory minimum, margin call, market bubble, market clearing, market fragmentation, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mortgage debt, negative equity, new economy, North Sea oil, Northern Rock, open economy, paradox of thrift, Paul Samuelson, price stability, private sector deleveraging, purchasing power parity, pushing on a string, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, Richard Feynman, Richard Feynman, risk-adjusted returns, risk/return, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, shareholder value, short selling, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, too big to fail, Tyler Cowen: Great Stagnation, very high income, winner-take-all economy, zero-sum game

See, for example, ‘Austerity is Undermining Europe’s Grand Vision’, The Guardian, 3 July 2010, http://www.theguardian.com/commentisfree/2012/jul/03/austerity-europe-grand-vision-unity. 55. Karl Brenke, Ulf Rinne, Klaus F. Zimmermann, ‘Short-Time Work: The German Answer to the Great Recession’, IZA Discussion Paper 5780, June 2011, http://ftp.iza.org/dp5780.pdf. 56. See Government Commission of the German Corporate Governance Code, ‘German Corporate Governance Code (as amended on 18 June 2009), http://www.corporate-governance-code.de/eng/kodex/1.html. 57. Reinhart and Rogoff, This Time is Different, p. 224. Note that these data are for annual GDP per head at purchasing power parity, rather than GDP. The difference should not be large for these high-income countries with relatively slowly growing populations. The exception would be the US, where GDP per head fell somewhat faster than GDP.

Gordon, Robert. ‘Is U. S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds’, National Bureau of Economic Research Working Paper No. 18315, August 2012. www.nber.org. Gorton, Gary B. Misunderstanding Financial Crises: Why we Don’t See them Coming (Oxford: Oxford University Press, 2012). Government Commission of the German Corporate Governance Code. ‘German Corporate Governance Code (as amended 18 June 2009)’, 2009. http://www.corporate–governance–code.de/eng/kodex/1.html. Gov.uk. ‘Help to Buy: Home Ownership Schemes’, 2013. https://www.gov.uk/affordable-home-ownership-schemes/help-to-buy-equity-loans. Greenspan, Alan. ‘Testimony of Dr Alan Greenspan to the House of Representatives Committee of Government Oversight and Reform’, 23 October 2008. http://www.clipsandcomment.com/2008/10/23/text-alan-greenspan-testimony-congress-october-23.

The evidence at present is that high-income countries are no longer able to absorb the savings that would be generated by their private sectors if their economies were running at something close to full capacity and were also not experiencing an unsustainable credit expansion.46 This is why activity has been persistently weak and real interest rates low. Whether this is inevitable or the result of rising inequality and failures in corporate governance is unclear: probably a bit of all of these. The condition of excess private-sector savings still exists. So, if these excess savings are not to be absorbed in the fiscal deficit (to which we will return in the next section), the only alternatives are to eliminate them via a depression or export them. In brief, all the high-income countries would then become like Germany and the rest of the world economy would become large net importers of capital.

Making Globalization Work by Joseph E. Stiglitz

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affirmative action, Andrei Shleifer, Asian financial crisis, banking crisis, barriers to entry, Berlin Wall, business process, capital controls, central bank independence, corporate governance, corporate social responsibility, currency manipulation / currency intervention, Doha Development Round, Exxon Valdez, Fall of the Berlin Wall, Firefox, full employment, Gini coefficient, global reserve currency, Gunnar Myrdal, happiness index / gross national happiness, illegal immigration, income inequality, income per capita, incomplete markets, Indoor air pollution, informal economy, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), inventory management, invisible hand, John Markoff, Kenneth Arrow, Kenneth Rogoff, low skilled workers, manufacturing employment, market fundamentalism, Martin Wolf, microcredit, moral hazard, North Sea oil, offshore financial centre, oil rush, open borders, open economy, price stability, profit maximization, purchasing power parity, quantitative trading / quantitative finance, race to the bottom, reserve currency, rising living standards, risk tolerance, Silicon Valley, special drawing rights, statistical model, the market place, The Wealth of Nations by Adam Smith, Thomas L Friedman, trade liberalization, trickle-down economics, union organizing, Washington Consensus, zero-sum game

This book is as much about how politics has been used to shape the economic system as it is about economics itself. Economists believe that incentives matter. There are strong incentives—and enormous opportunities—to shape political processes and the economic system in ways that generate profits for some at the expense of the many. Open, democratic processes can circumscribe the power of special interest groups. We can bring ethics back into business. Corporate governance can recognize the rights not only of shareholders but of others who are touched by the actions of the corporations.'° An engaged and educated citizenry can understand how to make globalization work, or at least work better, and can demand that their political leaders shape globalization accordingly. I hope this book will help make this vision a reality. ACKNOWLEDGMENTS y list of those to whom I am indebted for my understanding of globalization has grown much longer over the past four years since writing Globalization and Its Discontents.

It was as if the advisers believed that opening a birdcage would encourage birds to fly into the cage, rather than encouraging the birds in the cage to fly out. When I was chief economist of the World Bank, we had an intense debate about those privatizations. I was among those who worried that rapid privatizations not only generated lower revenue for governments desperately in need of money but undermined confidence in the market economy. Without appropriate laws concerning corporate governance, there might be massive theft of corporate assets by managers; there would be incentives to strip assets rather than to build wealth. I worried too about the huge inequality to which these privatization could give rise. The other side said: Don't worry, just privatize as rapidly as possible; the new owners will make sure that resources are well used and the economy will grow. Unfortunately, what happened in Russia and elsewhere was even worse than I had feared.

The government got out of agriculture and gave families the right to control the land, and agricultural productivity soared. At the same time, the central government moved away from micromanaging every detail of the economy to managing the overall economic framework, including ensuring a supply of finance for the development of infrastructure. As China's transition evolved, the government realized that continued success would require stronger laws concerning corporate governance. It realized too that, in the zeal to strengthen the market, areas such as rural education and health had been left behind. The 2006 five-year plan sets out to redress these imbalances. The list of potential arenas for government action is large. Today, nearly everyone agrees that government needs to be involved in providing basic education, legal frameworks, infrastructure, and some elements of a social safety net, and in regulating competition, banks, and environmental impacts.


pages: 397 words: 112,034

What's Next?: Unconventional Wisdom on the Future of the World Economy by David Hale, Lyric Hughes Hale

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affirmative action, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Berlin Wall, Black Swan, Bretton Woods, capital controls, Cass Sunstein, central bank independence, cognitive bias, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, debt deflation, declining real wages, deindustrialization, diversification, energy security, Erik Brynjolfsson, Fall of the Berlin Wall, financial innovation, floating exchange rates, full employment, Gini coefficient, global reserve currency, global village, high net worth, Home mortgage interest deduction, housing crisis, index fund, inflation targeting, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Just-in-time delivery, Kenneth Rogoff, labour market flexibility, labour mobility, Long Term Capital Management, Mahatma Gandhi, Martin Wolf, Mexican peso crisis / tequila crisis, Mikhail Gorbachev, money market fund, money: store of value / unit of account / medium of exchange, mortgage tax deduction, Network effects, new economy, Nicholas Carr, oil shale / tar sands, oil shock, open economy, passive investing, payday loans, peak oil, Ponzi scheme, post-oil, price stability, private sector deleveraging, purchasing power parity, quantitative easing, race to the bottom, regulatory arbitrage, rent-seeking, reserve currency, Richard Thaler, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, sovereign wealth fund, special drawing rights, technology bubble, The Great Moderation, Thomas Kuhn: the structure of scientific revolutions, Tobin tax, too big to fail, total factor productivity, trade liberalization, Washington Consensus, Westphalian system, women in the workforce, yield curve

The US consumer has begun to spend again. German manufacturing orders have bottomed, and exports benefitted from the Greek crisis in the monetary union. British house prices are increasing. And rising commodity prices are buoying confidence in Latin America and Africa. This book will examine the outlook for 2011 and beyond from a variety of regional perspectives. It will also examine new developments in tax policy, corporate governance, climate change, and communications. The goal of this compendium is to provide original insights from a diverse mixture of independent analysts and forecasters. The contributors include the founder of the Hong Kong currency board, the former prime minister of Peru, the former research director of the central bank of Botswana, the founder of a Mexican fund management group, economic analysts in Hong Kong, a former director of the Davos World Economic Forum, and many other distinguished authors.

Carole Basri examines how the recent financial crisis will affect the future of corporate compliance. She notes that the crisis has led institutions to reduce their headcounts in compliance and ethics departments. She views this as a negative development because the crisis itself resulted from a breakdown of compliance and ethics at leading banks and brokerage houses. She believes that governments will have a critical role to play in promoting improved corporate governance. She also believes that the public can play an important role by creating more ethics and compliance programs in business schools, law schools, and other institutions. The US government itself has been less effective at prosecuting the financial criminals in the recent crisis than it was in the past. The US government will have to strengthen the law enforcement process in order to promote more respect for the law among senior bankers.

It requires originators of mortgage-backed securities to retain 5 percent ownership in the hope that having “skin in the game” will ensure greater underlying quality. Extending FDIC protection to accounts of up to $250,000 corrects for erosion by inflation of the previous $100,000 cap. Provisions to prevent “shopping around” for rating agencies can prevent abuses. Increasing the ability to sue those agencies will add accountability and multiply costly nuisance suits. Trading many derivatives on exchanges will increase transparency. Corporate governance provisions create the impression that shareholders have more of a say on executive pay and other matters, but the provisions will have minimal practical effect. Collectively, these provisions will create modestly higher costs for financial firms that will ultimately translate into a higher cost of capital. Consumer Protection Juggernaut The most problematic element of Dodd-Frank has absolutely no connection to the financial crisis.


pages: 355 words: 92,571

Capitalism: Money, Morals and Markets by John Plender

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activist fund / activist shareholder / activist investor, Andrei Shleifer, asset-backed security, bank run, Berlin Wall, Big bang: deregulation of the City of London, Black Swan, bonus culture, Bretton Woods, business climate, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collapse of Lehman Brothers, collective bargaining, computer age, Corn Laws, corporate governance, creative destruction, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, discovery of the americas, diversification, Eugene Fama: efficient market hypothesis, eurozone crisis, failed state, Fall of the Berlin Wall, fiat currency, financial innovation, financial intermediation, Fractional reserve banking, full employment, God and Mammon, Gordon Gekko, greed is good, Hyman Minsky, income inequality, inflation targeting, information asymmetry, invention of the wheel, invisible hand, Isaac Newton, James Watt: steam engine, Johann Wolfgang von Goethe, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, joint-stock company, Joseph Schumpeter, labour market flexibility, liberal capitalism, light touch regulation, London Interbank Offered Rate, London Whale, Long Term Capital Management, manufacturing employment, Mark Zuckerberg, market bubble, market fundamentalism, mass immigration, means of production, Menlo Park, money market fund, moral hazard, moveable type in China, Myron Scholes, Nick Leeson, Northern Rock, Occupy movement, offshore financial centre, paradox of thrift, Paul Samuelson, Plutocrats, plutocrats, price stability, principal–agent problem, profit motive, quantitative easing, railway mania, regulatory arbitrage, Richard Thaler, rising living standards, risk-adjusted returns, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, shareholder value, short selling, Silicon Valley, South Sea Bubble, spice trade, Steve Jobs, technology bubble, The Chicago School, The Great Moderation, the map is not the territory, The Wealth of Nations by Adam Smith, Thorstein Veblen, time value of money, too big to fail, tulip mania, Upton Sinclair, Veblen good, We are the 99%, Wolfgang Streeck, zero-sum game

Three years there left me with a profound distaste for accountancy and a qualification that I did not expect to be of much use. Yet I acquired a growing interest in the workings of the global economy and an enduring concern about the ethical basis of capitalism. These are subjects that I pursued in my subsequent career in journalism, which was later to be informed by practical experience as, among other things, a non-executive director and chairman of a quoted company, and pro bono work on corporate governance around the globe for the World Bank Group and the Organisation for Economic Cooperation and Development. This book contains the fruits of that experience. It explores current discontents in a historical context, looking at many of the great debates about money, business and markets not just through the eyes of economists and business people, but through the views of philosophers, politicians, novelists, poets, divines, artists and sundry others.

The formation of the South Sea Company in the new century, together with the stellar performance of its stock, accelerated an already powerful slew of incorporations, with 195 joint stock companies being formed in the year to August 1720. These were popularly known as ‘bubbles’. A central feature of incorporation was that it increased the scope for fraud, because the people running the bubble companies had access to other people’s money. In the modern jargon, there was a principal–agent problem. The agents, or managers, were not properly accountable to the principals, or stockholders, because corporate governance was rudimentary. Trading in the shares was frenetic and often fraudulent, as Daniel Defoe, author of Robinson Crusoe, explained in a tract entitled The Anatomy of Change-Alley, in which he said: There is not a man but will own ’tis a complete system of knavery; that ’tis a trade founded in fraud, born of deceit, and nourished by trick, cheat, wheedle, forgeries, falsehoods, and all sorts of delusions; coining false news, this way good, that way bad; whispering imaginary terrors, frights, hopes, expectations and then preying upon the weakness of those whose imaginations they have wrought upon, whom they have either elevated or depressed.32 When the South Sea Company collapsed, fraud was revealed on the part of directors, who had corrupted members of the cabinet, using shares in the company as bribes.

Given the choice, many executives in the Anglo-American world, whose average tenure at the top has shrunk to very short time periods in recent years, appear to be choosing to invest in share buybacks in preference to plant and machinery. So while bonuses have been going up as these people seize their brief window of opportunity, business investment as a percentage of GDP has been on a persistent declining trend in the US and UK.219 This is a travesty of shareholder value, the supposed objective of modern managers who run publicly quoted companies. It reflects a huge and egregious corporate governance vacuum – another profound imbalance at the heart of modern capitalism. Institutional investors have done little to prevent a pattern of behaviour that damages the long-term value of their investments. This is because, as we saw in Chapter Seven, they are mere proxy capitalists, driven by perverse incentives that ensure that their own interests are misaligned with those of the pension fund beneficiaries and other savers they are supposed to serve.


pages: 345 words: 92,849

Equal Is Unfair: America's Misguided Fight Against Income Inequality by Don Watkins, Yaron Brook

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3D printing, Affordable Care Act / Obamacare, Apple II, barriers to entry, Berlin Wall, Bernie Madoff, blue-collar work, business process, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, collective bargaining, colonial exploitation, corporate governance, correlation does not imply causation, creative destruction, Credit Default Swap, crony capitalism, David Brooks, deskilling, Edward Glaeser, Elon Musk, en.wikipedia.org, financial deregulation, immigration reform, income inequality, indoor plumbing, inventory management, invisible hand, Isaac Newton, Jeff Bezos, Jony Ive, laissez-faire capitalism, Louis Pasteur, low skilled workers, means of production, minimum wage unemployment, Naomi Klein, new economy, obamacare, Peter Singer: altruism, Peter Thiel, profit motive, rent control, Ronald Reagan, Silicon Valley, Skype, statistical model, Steve Jobs, Steve Wozniak, The Spirit Level, too big to fail, trickle-down economics, Uber for X, urban renewal, War on Poverty, wealth creators, women in the workforce, working poor, zero-sum game

This means that there is “no reason to pay the most talented senior officers what they [are] worth, because they . . . have no place else to go.”39 In other words, Frank and Cook are arguing that there is a cultural element to CEO pay, but it’s actually the reverse of what critics like Krugman and Piketty claim: the U.S. doesn’t pay CEOs more than they are worth—other countries pay them less than they would be worth if there was competition for their talents. Whatever the truth, there is simply no credible evidence for the thesis that CEO pay has risen because of corporate governance failures (which is not to say that such failures never happen). And it turns out, the inequality critics never really try to offer evidence for this thesis. Instead, they claim that the academic literature can’t fully explain CEO pay trends in terms of market forces and then go on to treat the corporate governance hypothesis as the default explanation for this gap. Piketty, for instance, argues that: The most convincing proof of the failure of corporate governance and of the absence of a rational productivity justification for extremely high executive pay is that when we collect data about individual firms . . . it is very difficult to explain the observed variations in terms of firm performance.

If executive pay were determined by marginal productivity, one would expect its variance to have little to do with external variances and to depend solely or primarily on nonexternal variances. In fact, we observe just the opposite: it is when sales and profits increase for external reasons that executive pay rises most rapidly.40 Some of the problems with Piketty’s claims are fairly technical. But the most glaring error is treating the fact that “it is very difficult to explain the observed variations in terms of firm performance” as evidence for “the failure of corporate governance.” There are countless other explanations, which Piketty doesn’t even acknowledge. It could be that Piketty’s study was simply poorly designed. (In our view, trying to tease out “marginal productivity” from messy empirical data is a dubious exercise.) It could be that Piketty’s interpretation is not the only one consistent with the data. As Jim Manzi points out, “it may be that when times are booming in an industry, it’s worth more to keep the CEO on board.

But a company suffers from such mistakes: shareholders earn less, managers need to be fired, and competitors gain market share. In a free society, the right to make decisions about pay rests with the owners—owners who bear the consequences of those decisions and therefore have every incentive to make good decisions. Even if it were true that top incomes were being increased beyond an amount that was justified by executive productivity as the result of corporate governance failures, this would be a problem a free market could and (eventually) would solve. But the inequality critics have absolutely no basis for their confident assertions that rising pay at the top is being fueled by CEOs finding a way to get paid more than they’re worth. The critics have not been convinced by the evidence. Rather, they show a clear track record of cherry-picking studies that are consistent with their view that high CEO pay is inherently bad because it promotes inequality.


pages: 421 words: 110,406

Platform Revolution: How Networked Markets Are Transforming the Economy--And How to Make Them Work for You by Sangeet Paul Choudary, Marshall W. van Alstyne, Geoffrey G. Parker

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3D printing, Affordable Care Act / Obamacare, Airbnb, Alvin Roth, Amazon Mechanical Turk, Amazon Web Services, Andrei Shleifer, Apple's 1984 Super Bowl advert, autonomous vehicles, barriers to entry, big data - Walmart - Pop Tarts, bitcoin, blockchain, business process, buy low sell high, chief data officer, Chuck Templeton: OpenTable, clean water, cloud computing, connected car, corporate governance, crowdsourcing, data acquisition, data is the new oil, digital map, discounted cash flows, disintermediation, Edward Glaeser, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, financial innovation, Haber-Bosch Process, High speed trading, information asymmetry, Internet of things, inventory management, invisible hand, Jean Tirole, Jeff Bezos, jimmy wales, John Markoff, Khan Academy, Kickstarter, Lean Startup, Lyft, Marc Andreessen, market design, Metcalfe’s law, multi-sided market, Network effects, new economy, payday loans, peer-to-peer lending, Peter Thiel, pets.com, pre–internet, price mechanism, recommendation engine, RFID, Richard Stallman, ride hailing / ride sharing, Robert Metcalfe, Ronald Coase, Satoshi Nakamoto, self-driving car, shareholder value, sharing economy, side project, Silicon Valley, Skype, smart contracts, smart grid, Snapchat, software is eating the world, Steve Jobs, TaskRabbit, The Chicago School, the payments system, Tim Cook: Apple, transaction costs, two-sided market, Uber and Lyft, Uber for X, winner-take-all economy, zero-sum game, Zipcar

Risk is a perennial problem in all markets, not just on platforms. A well-designed market generally develops tools and systems that serve to mitigate the effects of risk, thereby encouraging participants to engage in more interactions. TOOLS FOR GOVERNANCE: LAWS, NORMS, ARCHITECTURE, AND MARKETS The literature on corporate governance is vast, especially in the field of finance. However, platform governance involves design principles that traditional finance theory overlooks. The single most heavily cited article on corporate governance is a literature survey that considers only “the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment.”17 The focus here is on the information asymmetry arising from the separation of ownership and control—a critical element of governance design, but far from sufficient.18 Information asymmetry between the community of users and the firm also matters, and their interests too must be aligned.

The single most heavily cited article on corporate governance is a literature survey that considers only “the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment.”17 The focus here is on the information asymmetry arising from the separation of ownership and control—a critical element of governance design, but far from sufficient.18 Information asymmetry between the community of users and the firm also matters, and their interests too must be aligned. Additionally, platform governance rules must pay special heed to externalities. These are endemic in network markets, since, as we’ve seen when examining network effects, the spillover benefits users generate are a source of platform value. Understanding this forces a shift in corporate governance from a narrow focus on shareholder value to a broader view of stakeholder value. Market designer and Nobel Prize-winning economist Alvin Roth described a model of governance that uses four broad levers to address market failures.19 According to Roth, a well-designed market increases the safety of the market via transparency, quality, or insurance, thereby enabling good interactions to occur.

But the existence of the phenomenon of regulatory capture is not necessarily a fatal blow to the argument in favor of regulation—or even the argument in favor of regulating platforms in particular. It’s possible to argue that, rather than eliminating regulation altogether, we need to design political, social, and economic systems that reduce the likelihood of regulatory capture—for example, through laws that restrict the “revolving door” between business and government. Economist Andrei Shleifer, a scholar in the areas of corporate governance and government regulation, points out that there are strong differences in the prevalence of regulatory capture across countries. When governments are relatively unchecked by their citizens, strong regulation often leads to high levels of corruption and expropriation by government officials. And, indeed, this is widely seen in authoritarian countries. However, in countries with more accountable governments, such as those seen in northern Europe, higher levels of regulation appear to be relatively free of such corruption, which reduces the level of regulatory capture.


pages: 356 words: 103,944

The Globalization Paradox: Democracy and the Future of the World Economy by Dani Rodrik

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affirmative action, Asian financial crisis, bank run, banking crisis, bilateral investment treaty, borderless world, Bretton Woods, British Empire, capital controls, Carmen Reinhart, central bank independence, collective bargaining, colonial rule, Corn Laws, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, currency manipulation / currency intervention, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, Doha Development Round, en.wikipedia.org, endogenous growth, eurozone crisis, financial deregulation, financial innovation, floating exchange rates, frictionless, frictionless market, full employment, George Akerlof, guest worker program, Hernando de Soto, immigration reform, income inequality, income per capita, industrial cluster, information asymmetry, joint-stock company, Kenneth Rogoff, labour market flexibility, labour mobility, land reform, liberal capitalism, light touch regulation, Long Term Capital Management, low skilled workers, margin call, market bubble, market fundamentalism, Martin Wolf, mass immigration, Mexican peso crisis / tequila crisis, microcredit, Monroe Doctrine, moral hazard, night-watchman state, non-tariff barriers, offshore financial centre, oil shock, open borders, open economy, Paul Samuelson, price stability, profit maximization, race to the bottom, regulatory arbitrage, savings glut, Silicon Valley, special drawing rights, special economic zone, The Wealth of Nations by Adam Smith, Thomas L Friedman, Tobin tax, too big to fail, trade liberalization, trade route, transaction costs, tulip mania, Washington Consensus, World Values Survey

First, markets and governments are complements, not substitutes. If you want more and better markets, you have to have more (and better) governance. Markets work best not where states are weakest, but where they are strong. Second, capitalism does not come with a unique model. Economic prosperity and stability can be achieved through different combinations of institutional arrangements in labor markets, finance, corporate governance, social welfare, and other areas. Nations are likely to—and indeed are entitled to—make varying choices among these arrangements depending on their needs and values. Trite as they may sound as stated, these ideas have enormous implications for globalization and for democracy, and for how far we can take each in the presence of the other. Once you understand that markets require public institutions of governance and regulation in order to function well, and further, you accept that nations may have different preferences over the shape that those institutions and regulations should take, you have started to tell a story that leads you to radically different endings.

“Unlike the economic nationalism of the thirties,” Ruggie writes, the regime “would be multilateral in character; unlike the liberalism of the gold standard and free trade, its multilateralism would be predicated upon domestic interventionism.”7 The considerable maneuvering room afforded by these trade rules allowed advanced nations to build customized versions of capitalism around distinct approaches to corporate governance, labor markets, tax regimes, business-government relations, and welfare state arrangements. What emerged, in a phrase coined by the political scientists Peter Hall and David Soskice, were “varieties of capitalism.”8 The United States, Britain, France, Germany, or Sweden were each market-based economies, but the institutions that underpinned their markets differed substantially and bore unmistakably national characteristics.

Even though many globalization advocates are ambivalent about financial globalization for the reasons outlined earlier, Mishkin remains an unabashed booster.5 He is also under no illusion as to what will make financial globalization work. Emerging market economies need “good institutions” that promote property rights “such as the rule of law, constraints on government expropriation, and absence of corruption.” They also need institutions that promote an efficient financial system, such as “financial regulation to encourage transparency, good corporate governance, prudential supervision to limit excessive risk taking, and good enforcement of financial contracts.” These reforms in turn require extensive legal and political transformations to relax the grip of incumbents in the system and open it to competition.6 What is striking in arguments such as these is how extensive and imprecise—simultaneously—the list of prerequisites can be. Many economists describe the institutional requirements for successful opening to finance as if they were simply a matter of turning certain policy switches on and off.


pages: 273 words: 34,920

Free Market Missionaries: The Corporate Manipulation of Community Values by Sharon Beder

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anti-communist, battle of ideas, business climate, corporate governance, en.wikipedia.org, full employment, income inequality, invisible hand, liquidationism / Banker’s doctrine / the Treasury view, minimum wage unemployment, Mont Pelerin Society, new economy, old-boy network, popular capitalism, Powell Memorandum, price mechanism, profit motive, Ralph Nader, rent control, risk/return, road to serfdom, Ronald Reagan, school vouchers, shareholder value, spread of share-ownership, structural adjustment programs, The Chicago School, the market place, The Wealth of Nations by Adam Smith, Thomas L Friedman, Torches of Freedom, trade liberalization, traveling salesman, trickle-down economics, Upton Sinclair, Washington Consensus, wealth creators, young professional

It was a long-term project, and Hayek warned the others that they should expect a long-term, but winnable, struggle: ‘What to the contemporary observer appears as a battle of conflicting interests decided by the votes of the masses,’ he said, ‘has usually been decided long before in a battle of ideas confined to narrow circles.’7 The Mont Pèlerin Society was the seed that started a network of some 78 institutions. The society forged links with like-minded think tanks, corporations, governments and university economics departments, becoming the intellectual and ideological inspiration for economic fundamentalists around the world. Although the society itself has a very low profile it has exercised a strong influence through its more than 500 members – who hold key positions in government, government bureaucracies and in an array of think tanks – as well as its informal networks.8 The efforts of the Mont Pèlerin Society would have come to nothing, however, had business interests not embraced their ideas and poured money into their networks and think tanks from the 1970s.

Gates’ second book, Democracy at Risk: Rescuing Main Street from Wall Street – a Populist Vision for the 21st Century (2000), makes a similar argument, and has been endorsed by people as diverse as Klaus Schwab, president of the World Economic Forum, and consumer rights’ advocate Ralph Nader.67 The European Commission is also keen to encourage shareholder democracy, and to this end is seeking to harmonize corporate government codes in Europe to make it easier for lay people to invest. Frits Bolkestein, European commissioner for the internal market, said in 2002: ‘I want to have a European market in shares, a shareholder democracy, one share one vote.’ Jean-Pierre Thomas, an investment 186 FREE MARKET MISSIONARIES banker and member of the French parliament, unsuccessfully promoted legislation ‘to establish tax-subsidized personal pension funds in hopes of turning France into a nation of shareholders’.68 NOTES 1 Ronald Brownstein, ‘Though Workers Are Now Investors, They Don’t Think Like Capitalists’, Los Angeles Times, 15 November 1999, pA5. 2 IRC, ‘Profile: Empower America’, Interhemispheric Resource Center, 22 November 2003, http://rightweb.irc-online.org/org/empower.php. 3 Empower America, ‘Mission’, Empower America, www.empoweramerica.org/about accessed 26 December 2002; FreedomWorks, ‘Our Mission’, FreedomWorks, www. freedomworks.org/know/mission.php accessed 11 January 2005. 4 Richard Nadler, ‘Investor Class Act’, National Review, 22 May 2000b; Richard W.

(eds) The Big Business Reader: On Corporate America, New York, Pilgrim Press, 1983, p378. Ibid., p377. Ibid., pp378–9. Carter, ‘The Myth of Shareholder Democracy’. Lewis Braham, ‘Bring Democracy to Boardroom Elections’, Business Week, 21 October 2002, p126. William Taylor, ‘Can Big Owners Make a Difference’, Harvard Business Review, September/October, 1990; James McRitchie, ‘Enhancing the Return on Capital through Increased Accountability’, Corporate Governance, 26 March 2000, www. corpgov.net/. Nathaniel Nash, ‘Shareholders’ Rights: Three Views: Vying for Control of the Public Corporation’, New York Times, 15 February 1987. Kerry Capell and David Fairlamb, ‘Everyone Is Selling, No One Is Buying’, Business Week, 22 July 2002; Colin Robinson, ‘Pressure Groups and Political Forces in Britain’s Privatisation Programme’, Paper presented at the Japan Public Choice Society International Conference, Chiba University of Commerce, 22–23 August 1997, p8; Whitfield, Making It Public, p30; Thomas, ‘The Privatization of the Electricity Supply Industry’, p41; Julia Flynn, ‘Will Britain Ever Be a Nation of Stock-Keepers?’

Undoing the Demos: Neoliberalism's Stealth Revolution by Wendy Brown

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Affordable Care Act / Obamacare, bitcoin, Branko Milanovic, Capital in the Twenty-First Century by Thomas Piketty, collective bargaining, corporate governance, credit crunch, crowdsourcing, David Brooks, Food sovereignty, haute couture, immigration reform, income inequality, invisible hand, labor-force participation, late capitalism, means of production, new economy, obamacare, occupational segregation, Philip Mirowski, Ronald Reagan, sexual politics, shareholder value, sharing economy, The Chicago School, the market place, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, trickle-down economics, Washington Consensus, Wolfgang Streeck, young professional, zero-sum game

Consider this from Pierre-Yves Gomez and Harry Korine, two management specialists writing about democracy and governance: “One can discern a process of transformation in corporate governance that accompanies economic development over time. We show that this process can be understood as the democratization of corporate governance. Our ref lection is based upon the observation that, in modern liberal society, the governance of human beings tends, over time, to democratize: the more the entrepreneurial force becomes concentrated in ever larger corporations, the greater the need for social frag- 274  n o t e s mentation to maintain the legitimacy of governance — so as to ensure that corporations are governed according to the liberal spirit.” Entrepreneurs and Democracy: A Political Theory of Corporate Governance (Cambridge: Cambridge University Press, 2008), pp. 8–9. In this remarkable book, the authors argue that what they call the “democratization of corporate governance” and the growth of economic performance depend upon a natural fragmentation of power that they regard as indigenous to entrepreneurial and democratic societies. 17.

There is no settled definition of governance, and scholars differ significantly in their understanding and use of it.15 Some emphasize the departure it signifies from the centrality of the state in organizing society and human conduct. Others use it to indicate novel processes 122  u n d o in g t h e d e m o s of governing. Still others highlight the new norms it circulates. Fifteen years ago, R. A. W. Rhodes already had identified at least six distinct uses of governance: “As the minimal state, as corporate governance, as the new public management, as ‘good governance’, as a sociocybernetic system, as self-organizing networks.”16 However, almost all scholars and definitions converge on the idea that governance signifies a transformation from governing through hierarchically organized command and control — in corporations, states, and nonprofit agencies alike — to governing that is networked, integrated, cooperative, partnered, disseminated, and at least partly self-organized.

In this remarkable book, the authors argue that what they call the “democratization of corporate governance” and the growth of economic performance depend upon a natural fragmentation of power that they regard as indigenous to entrepreneurial and democratic societies. 17. See Wendy Brown, “We Are All Democrats Now . . . ” in Giorgio Agamben, et al., Democracy in What State? (New York: Columbia University Press, 2011). 18. I do not think the value of democracy is properly extended to every venue or activity of life. I think it fits poorly with decision making in most classrooms, in hospitals, in emergency response teams, or other places where expertise or other bases of authority are more relevant than self-rule. 19. Rousseau, Social Contract, pp. 64 and 84–88. 20. A crucial and complex term in Of Grammatology, the “supplement” may be crudely defined as something that is formally outside of a primary term or binary, but that supports or sustains it.


pages: 193 words: 11,060

Ethics in Investment Banking by John N. Reynolds, Edmund Newell

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accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, banking crisis, capital controls, collapse of Lehman Brothers, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, discounted cash flows, financial independence, index fund, invisible hand, light touch regulation, margin call, moral hazard, Nick Leeson, Northern Rock, quantitative easing, shareholder value, short selling, South Sea Bubble, stem cell, the market place, The Wealth of Nations by Adam Smith, too big to fail, zero-sum game

Professors Tim Besley and Peter Hennessy (2009) Letter to HM Queen Elizabeth II, 22 July 2009, following the British Academy Forum “The Global Financial Crisis – Why Didn’t Anybody Notice?”. 3. Susan Strange (1986), Casino Capitalism (Oxford: Blackwell). 4. Goldman Sachs, Code of Business Conduct and Ethics (Amended and Restated as of May 2009). 162 Notes 163 5. http://www2.goldmansachs.com/our-firm/our-people/business-principles.html, accessed 8 March 2011. 6. http://www2.goldmansachs.com/our-firm/investors/corporate-governance/ corporate-governance-documents/revise-code-of-conduct.pdf, accessed 8 March 2011. 7. http://www.morganstanley.com/company/governance/pdf/codeofethicsweb version.pdf, accessed 8 March 2011. 8. http://www.nomuraholdings.com/company/basic/ethics.pdf, accessed 8 March 2011. Chapter 4 1. Katinka C. van Cranenburgh, Daniel Arenas, Celine Louche, Jordi Vives (2010) From Faith to Faith Consistent Investing (3iG). 2.

Nevertheless, the criticisms levelled at investment banking as a result of the financial crisis are legitimate, and many of them raise profound ethical issues. 4 Ethics in Investment Banking Ethics and the financial crisis The causes of the financial crisis are complex, but include ethical failings by investment banks (among others). The US Financial Crisis Inquiry Commission blamed failures in regulation; breakdowns in corporate governance, including financial firms acting recklessly; excessive borrowing and risk by households and Wall Street; policymakers ill-prepared for the crisis; and systematic breakdown in accountability and ethics.1 The UK’s Independent Commission on Banking cited factors including “global imbalances, loose monetary policy, light-touch regulation, declining under-writing standards, widespread mis-pricing of risk, a vast expansion of banks’ balance sheets, rapid growth in securitized assets”.2 The UK economist Roger Bootle diagnosed the crisis in a more straightforward way in his 2009 book The Trouble with Markets: “greedy bankers and naive borrowers, mistaken central banks and inept regulators, insatiable Western consumers and over-thrifty Chinese savers”.3 Others have also directly cited bankers’ greed.

Within the Anglican Communion, the Church of England has a general statement on the ethics of its own investments of about £5 billion, issued by its Ethical Investment Advisory Group (EIAG), in its “Statement of Ethical Investment Policy”.4 This specifically covers the Church’s own investments, rather than forming advice to investors or businesses. As well as summarising sector-specific investment policies (notably investment exclusions), it lists five areas against which companies are monitored: responsible employment practices, best corporate governance practice, conscientiousness with regard to human rights, sustainable environmental practice and sensitivity towards the communities in which business operates. The Methodist Church Methodism, which emerged out of Anglicanism in the eighteenth century through the activities of John Wesley and others, has throughout its history maintained a keen awareness of ethics in business and economic 54 Ethics in Investment Banking life.


pages: 263 words: 75,455

Quantitative Value: A Practitioner's Guide to Automating Intelligent Investment and Eliminating Behavioral Errors by Wesley R. Gray, Tobias E. Carlisle

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activist fund / activist shareholder / activist investor, Albert Einstein, Andrei Shleifer, asset allocation, Atul Gawande, backtesting, beat the dealer, Black Swan, capital asset pricing model, Checklist Manifesto, cognitive bias, compound rate of return, corporate governance, correlation coefficient, credit crunch, Daniel Kahneman / Amos Tversky, discounted cash flows, Edward Thorp, Eugene Fama: efficient market hypothesis, forensic accounting, hindsight bias, intangible asset, Louis Bachelier, p-value, passive investing, performance metric, quantitative hedge fund, random walk, Richard Thaler, risk-adjusted returns, Robert Shiller, Robert Shiller, shareholder value, Sharpe ratio, short selling, statistical model, survivorship bias, systematic trading, The Myth of the Rational Market, time value of money, transaction costs

It makes some intuitive sense that insiders with high conviction about the relative undervaluation of the stock would buy more of it, and that such trades would signal greater subsequent outperformance. This signal was reduced, however, when the trade was large in relation to the size of the stock, indicating that the market may be wary of trades that result in free-float reduction and possible deterioration in corporate governance. Giamouridis, Liodakis, and Moniz also find that the recent history of purchases is a key driver of outperformance. Insiders' trades in stocks where there have been many purchases over the preceding three months outperform. Notably, stocks that announce a buyback where insiders simultaneously purchase stock have a significant incremental outperformance, perhaps indicating that the insiders' purchases give credence to management's view that the company is undervalued.

In a 2008 paper, Brav, Jiang, Thomas, and Partnoy14 found that the “market reacts favorably to hedge fund activism.” The authors find market-beating returns upon the announcement of potential activism in the range of 5 to 7 percent, with no return reversal during the subsequent year (see Figure 9.5). FIGURE 9.5 Abnormal Returns around 13D Filings Source: Alon P. Brav, Wei Jiang, Randall S. Thomas, and Frank Partnoy, “Hedge Fund Activism, Corporate Governance, and Firm Performance.” Journal of Finance 63 (May 2008): 1729; ECGI Finance Working Paper No. 139/2006; Vanderbilt Law and Economics Research Paper No. 07-28; FDIC Center for Financial Research Working Paper No. 2008-06. Available at SSRN: http://ssrn.com/abstract=948907. In a 2009 paper, April Klein and Emanuel Zur15 examined “confrontational activism campaigns” by “entrepreneurial shareholder activists” and concluded that such strategies generate “significantly positive market reaction for the target firm around the initial Schedule 13D filing date” and “significantly positive returns over the subsequent year.”

Lauren Cohen, Christopher Malloy, and Lukasz Pomorski, “Decoding Insider Information.” Journal of Finance, forthcoming. 13. Daniel Giamouridis, Manolis Liodakis, and Andrew Moniz, “Some Insiders Are Indeed Smart Investors,” July 29, 2008. Available at http://ssrn.com/abstract=1160305 or http://dx.doi.org/10.2139/ssrn.1160305. 14. Alon P. Brav, Wei Jiang, Randall S. Thomas, and Frank Partnoy, “Hedge Fund Activism, Corporate Governance, and Firm Performance.” Journal of Finance 63 (May 2008): 1729; ECGI Finance Working Paper No. 139/2006; Vanderbilt Law and Economics Research Paper No. 07-28; FDIC Center for Financial Research Working Paper No. 2008-06. Available at http://ssrn.com/abstract=948907. 15. April Klein and Emanuel Zur, “Entrepreneurial Shareholder Activism: Hedge Funds and Other Private Investors.” Journal of Finance, forthcoming. 16.


pages: 75 words: 22,220

Occupy by Noam Chomsky

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corporate governance, corporate personhood, deindustrialization, Howard Zinn, income inequality, invisible hand, Martin Wolf, Nate Silver, Occupy movement, Plutonomy: Buying Luxury, Explaining Global Imbalances, precariat, Ralph Nader, Ronald Reagan, too big to fail, union organizing

This doesn’t benefit the economy—it probably harms it and the society—but it did lead to tremendous concentration of wealth, substantially there. On Politics and Money Concentration of wealth yields concentration of political power. And concentration of political power gives rise to legislation that increases and accelerates the cycle. The legislation, essentially bipartisan, drives new fiscal policies, tax changes, also rules of corporate governance, and deregulation. Alongside of this began the very sharp rise in the costs of elections, which drives the political parties even deeper than before into the pockets of the corporate sector. The parties dissolved, essentially, in many ways. It used to be that if a person in Congress hoped for a position such as a committee chair or some position of responsibility, he or she got it mainly through seniority and service.

Going back to your question about the movement’s demands, there are general ones that are very widely shared in the population: Concern about the inequality. Concern about the chicanery of the financial institutions and the way their influence on the government has led to a situation in which those responsible for the crisis are helped out, bailed out—richer and more powerful than ever, while the victims are ignored. There are very specific proposals concerning the regulation of financial transaction taxes, reversal of the rules of corporate governance that have led to this kind of situation: for example, a shifting of the tax code back to something more like what it used to be when the very rich were not essentially exempted from taxes, and many other quite specific demands of that kind. It goes on to include the interests of groups and their particular concerns, some of which are quite far reaching. But I think, if you investigate the Occupy movements and you ask them what are their demands, they are reticent to answer and rightly so, because they are essentially crafting a point of view from many disparate sources.


pages: 471 words: 124,585

The Ascent of Money: A Financial History of the World by Niall Ferguson

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Admiral Zheng, Andrei Shleifer, Asian financial crisis, asset allocation, asset-backed security, Atahualpa, bank run, banking crisis, banks create money, Black Swan, Black-Scholes formula, Bonfire of the Vanities, Bretton Woods, BRICs, British Empire, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collateralized debt obligation, colonial exploitation, commoditize, Corn Laws, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, deglobalization, diversification, diversified portfolio, double entry bookkeeping, Edmond Halley, Edward Glaeser, Edward Lloyd's coffeehouse, financial innovation, financial intermediation, fixed income, floating exchange rates, Fractional reserve banking, Francisco Pizarro, full employment, German hyperinflation, Hernando de Soto, high net worth, hindsight bias, Home mortgage interest deduction, Hyman Minsky, income inequality, information asymmetry, interest rate swap, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, iterative process, John Meriwether, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour mobility, Landlord’s Game, liberal capitalism, London Interbank Offered Rate, Long Term Capital Management, market bubble, market fundamentalism, means of production, Mikhail Gorbachev, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, Naomi Klein, negative equity, Nick Leeson, Northern Rock, Parag Khanna, pension reform, price anchoring, price stability, principal–agent problem, probability theory / Blaise Pascal / Pierre de Fermat, profit motive, quantitative hedge fund, RAND corporation, random walk, rent control, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, seigniorage, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spice trade, structural adjustment programs, technology bubble, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Bayes, Thomas Malthus, Thorstein Veblen, too big to fail, transaction costs, value at risk, Washington Consensus, Yom Kippur War

Siegel, Stocks for the Long Run: The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies (New York, 2000). 9 Elroy Dimson, Paul Marsh and Mike Stanton, Triumph of the Optimists: 101 Years of Global Investment Returns (Princeton, 2002). 10 Paul Frentrop, A History of Corporate Governance 1602-2002 (Brussels, 2003), pp. 49-51. 11 Ronald Findlay and Kevin H. O’Rourke, Power and Plenty: Trade, War, and the World Economy in the Second Millennium (Princeton, 2007), p. 178. 12 Frentrop, Corporate Governance, p. 59. 13 On the ambivalence of the Calvinist capitalist Dutch Republic, see Simon Schama, The Embarrassment of Riches: An Interpretation of Dutch Culture in the Golden Age (New York, 1997 [1987]). 14 John P. Shelton, ‘The First Printed Share Certificate: An Important Link in Financial History’, Business History Review, 39, 3 (Autumn 1965), p. 396. 15 Shelton, ‘First Printed Share Certificate’, pp. 400f. 16 Engel Sluiter, ‘Dutch Maritime Power and the Colonial Status Quo, 1585-1641’, Pacific Historical Review, 11, 1 (March 1942), p. 33. 17 Ibid., p. 34. 18 Frentrop, Corporate Governance, pp. 69f. 19 Larry Neal, ‘Venture Shares of the Dutch East India Company’, in William N.

Shelton, ‘The First Printed Share Certificate: An Important Link in Financial History’, Business History Review, 39, 3 (Autumn 1965), p. 396. 15 Shelton, ‘First Printed Share Certificate’, pp. 400f. 16 Engel Sluiter, ‘Dutch Maritime Power and the Colonial Status Quo, 1585-1641’, Pacific Historical Review, 11, 1 (March 1942), p. 33. 17 Ibid., p. 34. 18 Frentrop, Corporate Governance, pp. 69f. 19 Larry Neal, ‘Venture Shares of the Dutch East India Company’, in William N. Goetzmann and K. Geert Rouwenhorst (eds.), The Origins of Value: The Financial Innovations that Created Modern Capital Markets (Oxford, 2005), p. 167. 20 Neal, ‘Venture Shares’, p. 169. 21 Schama, Embarrassment of Riches, p. 349. 22 Ibid., p. 339. 23 Neal, ‘Venture Shares’, p. 169. 24 Frentrop, Corporate Governance, p. 85. 25 Ibid., pp. 95f. 26 Ibid., p. 103. Cf. Neal, ‘Venture Shares’, p. 171. 27 Neal, ‘Venture Shares’, p. 166. 28 Findlay and O’Rourke, Power and Plenty, p. 178. 29 Ibid., pp. 179-83.

In a tract entitled The Necessary Discourse (Nootwendich Discours), published in 1622, an anonymous author lamented the lack of transparency which characterized the ‘self-serving governance of certain of the directors’, who were ensuring that ‘all remained darkness’: ‘The account book, we can only surmise, must have been rubbed with bacon and fed to the dogs.’24 Directorships should be for fixed terms, the dissenters argued, and all major shareholders should have the right to appoint a director. The campaign for a reform of what would now be called the VOC’s corporate governance duly bore fruit. In December 1622, when the Company’s charter was renewed, it was substantially modified. Directors would no longer be appointed for life but could serve for only three years at a time. The ‘chief participants’ (shareholders with as much equity as directors) were henceforth entitled to nominate ‘Nine Men’ from among themselves, whom the Seventeen Lords were obliged to consult on ‘great and important matters’, and who would be entitled to oversee the annual accounting of the six chambers and to nominate, jointly with the Seventeen Lords, future candidates for directorships.


pages: 478 words: 126,416

Other People's Money: Masters of the Universe or Servants of the People? by John Kay

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Affordable Care Act / Obamacare, asset-backed security, bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, call centre, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, cognitive dissonance, corporate governance, Credit Default Swap, cross-subsidies, dematerialisation, diversification, diversified portfolio, Edward Lloyd's coffeehouse, Elon Musk, Eugene Fama: efficient market hypothesis, eurozone crisis, financial innovation, financial intermediation, financial thriller, fixed income, Flash crash, forward guidance, Fractional reserve banking, full employment, George Akerlof, German hyperinflation, Goldman Sachs: Vampire Squid, Growth in a Time of Debt, income inequality, index fund, inflation targeting, information asymmetry, intangible asset, interest rate derivative, interest rate swap, invention of the wheel, Irish property bubble, Isaac Newton, John Meriwether, light touch regulation, London Whale, Long Term Capital Management, loose coupling, low cost carrier, M-Pesa, market design, millennium bug, mittelstand, money market fund, moral hazard, mortgage debt, Myron Scholes, new economy, Nick Leeson, Northern Rock, obamacare, Occupy movement, offshore financial centre, oil shock, passive investing, Paul Samuelson, peer-to-peer lending, performance metric, Peter Thiel, Piper Alpha, Ponzi scheme, price mechanism, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, railway mania, Ralph Waldo Emerson, random walk, regulatory arbitrage, Renaissance Technologies, rent control, Richard Feynman, risk tolerance, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, Schrödinger's Cat, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, sovereign wealth fund, Spread Networks laid a new fibre optics cable between New York and Chicago, Steve Jobs, Steve Wozniak, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Tobin tax, too big to fail, transaction costs, tulip mania, Upton Sinclair, Vanguard fund, Washington Consensus, We are the 99%, Yom Kippur War

, Journal of Finance, 66 (6), December, Sabin, P., pp. 2055–82. 7. Augar, P., 2006, The Greed Merchants: How the Investment Banks Played the Free Market Game, London, Penguin, p. 107. 8. El Paso Corporation, Shareholder Litigation, 2012, Del. Ch 41 A.3d 432. 9. Goldman Sachs Code of Business Conduct and Ethics. Last accessed: 31 July 2014, http://www.goldmansachs.com/investor-relations/corporate-governance/corporate-governance-documents/revise-code-of-conduct.pdf. 10. Cohan, W. D., 2012, Money and Power, London, Penguin. 11. Summers, L., 2000, Remarks of Treasury Secretary Lawrence H. Summers to the Securities Industry Association, Office of Public Affairs, 9 November. 12. Transcript of investor conference call, 9 August 2007, reported on Bloomberg.com, 25 November 2008. 13. Congressional Oversight Panel, June Oversight Report: The AIG Rescue, Its Impact on Markets, and the Government’s Exit Strategy, 10 June 2010. 14.

, 1986, ‘Requiem for Regulation Q: What It Did and Why It Passed Away’, Federal Reserve Bank of St. Louis Review, February, 68 (2), pp. 22–37. Goff, S., and Parker, G., 2011, ‘Diamond Says Time for Remorse Is Over’, Financial Times, 11 January. Goldman Sachs Code of Business Conduct and Ethics, 2014. Last accessed: 31 July 2014, http://www.goldmansachs.com/investor-relations/corporate-governance/corporate-governance-documents/revise-code-of-conduct.pdf. Goodman, A., 2013, ‘Top 40 Buffett-isms: Inspiration to Become a Better Investor’, Forbes, 25 September. Greenspan, A., 1999, ‘Financial Derivatives’, speech to the Futures Industry Association, Boca Raton, FL, 19 March. Greenspan, A., 2008, Statement to the House, Committee on Oversight and Government Reform, Hearing, 23 October (Serial 110–209).

Stewardship does require securing the succession of competent managers to senior executive roles, ensuring that business strategy is properly developed and subjected to critical scrutiny, and – a role rendered necessary by the effects of financialisation – preventing senior executives enriching themselves at the expense of other shareholders. Stewardship involves rather more than the box-ticking approaches of the proxy services that have become integral to corporate governance – although smaller investment intermediaries, with more holdings than they can themselves effectively monitor (itself an indicator of a problem), may need to use these agencies. Effective stewardship, however, is integrated with investment management: there is no such thing as good governance of a bad business. To discharge the responsibilities of intermediaries in the investment channel, asset managers should hold more focused, concentrated portfolios, with fewer stocks.

Commodity Trading Advisors: Risk, Performance Analysis, and Selection by Greg N. Gregoriou, Vassilios Karavas, François-Serge Lhabitant, Fabrice Douglas Rouah

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Asian financial crisis, asset allocation, backtesting, capital asset pricing model, collateralized debt obligation, commodity trading advisor, compound rate of return, constrained optimization, corporate governance, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, discrete time, distributed generation, diversification, diversified portfolio, dividend-yielding stocks, fixed income, high net worth, implied volatility, index arbitrage, index fund, interest rate swap, iterative process, linear programming, London Interbank Offered Rate, Long Term Capital Management, market fundamentalism, merger arbitrage, Mexican peso crisis / tequila crisis, p-value, Pareto efficiency, Ponzi scheme, quantitative trading / quantitative finance, random walk, risk-adjusted returns, risk/return, selection bias, Sharpe ratio, short selling, stochastic process, survivorship bias, systematic trading, technology bubble, transaction costs, value at risk, zero-sum game

Ali is a Senior Lecturer in the Faculty of Law, University of Melbourne, and member of the University of Melbourne’s Centre for Corporate Law and Securities Regulation. He is also a principal of Stellar Capital, a private investment firm in Sydney. Dr. Ali previously worked for several years as a finance lawyer in Sydney. He is also a coauthor of Corporate Governance and Investment Fiduciaries (Sydney: Lawbook Co., 2003), which examines the corporate governance aspects of managed investment products. Mark Anson is the Chief Investment Officer for the California Public Employees’ Retirement System (CalPERS). He has complete responsibility for all asset classes in which CalPERS invests, including domestic and international equity and fixed income, real estate, corporate governance, currency overlay, securities lending, venture capital, leveraged buyouts, and hedge funds. Dr. Anson earned his law degree from the Northwestern University School of Law in Chicago, his Ph.D. and Master’s in Finance from the Columbia University Graduate School of Business in New York City, and his B.A. from St.

Anson is a member of the New York and Illinois State Bar associations and has earned accounting and financial designations. He is the author of four books on financial markets and has published over 60 research articles on the topics of corporate governance, hedge funds, real estate, currency overlay, credit risk, private equity, risk management, and portfolio management. Dr. Anson is on the editorial boards of five financial journals and sits on Advisory Committees for the New York Stock Exchange, the International Association of Financial Engineers, AIMR’s Task Force on Corporate Governance, the Center for Excellence in Accounting and Security Analysis at Columbia University, and the Alternative Investment Research Centre at the City University of London. Zsolt Berenyi holds an M.Sc. in Economics from the University of Budapest and a Ph.D. in Finance from the University of Munich.

Seiford. (1990) “Tnslation Invariance in Data Envelopment Analysis,” Operations Research Letters, Vol. 9, No. 6, pp. 403–405. Ali, P. U. (2000) “Unbundling Credit Risk: The Nature and Regulation of Credit Derivatives.” Journal of Banking and Finance Law and Practice, Vol. 11, No. 2, pp. 73–92. Ali, P. U. (2002) “Individual Share Futures in Australia.” Company and Securities Law Journal, Vol. 20, No. 4, pp. 232–235. Ali, P. U., G. Stapledon, and M. Gold. (2003) Corporate Governance and Investment Fiduciaries. Rozelle, New South Wales: Lawbook Company. Amenc, N., and L. Martellini. (2003) “The Brave New World of Hedge Fund Indices.” Working Paper (February), Edhec Risk and Asset Management Research Centre, Lille, France. Amenc, N., L. Martellini, and M. Vaissié. (2003) “Benefits and Risks of Alternative Investment Strategies.” Journal of Asset Management, Vol. 4, No. 2, pp. 96–118.


pages: 258 words: 63,367

Making the Future: The Unipolar Imperial Moment by Noam Chomsky

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Albert Einstein, Berlin Wall, Bretton Woods, British Empire, capital controls, collective bargaining, corporate governance, corporate personhood, creative destruction, deindustrialization, energy security, failed state, Fall of the Berlin Wall, financial deregulation, Frank Gehry, full employment, Howard Zinn, Joseph Schumpeter, kremlinology, liberation theology, Long Term Capital Management, market fundamentalism, Mikhail Gorbachev, Occupy movement, oil shale / tar sands, precariat, RAND corporation, Ronald Reagan, structural adjustment programs, The Great Moderation, too big to fail, uranium enrichment, Washington Consensus, WikiLeaks, working poor

Then came the $8 trillion housing bubble, unnoticed by the Federal Reserve and almost all economists, who were enthralled by efficient market dogmas. When the bubble burst, the economy collapsed to near Depression levels for manufacturing workers and many others. Concentration of income confers political power, which in turn leads to legislation that further enhances the privilege of the super-rich: tax policies, deregulation, rules of corporate governance and much else. Alongside this vicious cycle, costs of campaigning sharply increased, driving both political parties to cater to the corporate sector—the Republicans reflexively, and the Democrats (now pretty much the moderate Republicans of earlier years) following not far behind. In 1978, as the process was taking off, United Auto Workers President Doug Fraser condemned business leaders for having “chosen to wage a one-sided class war in this country—a war against working people, the unemployed, the poor, the minorities, the very young and the very old, and even many in the middle class of our society,” and having “broken and discarded the fragile, unwritten compact previously existing during a period of growth and progress.”

They trace back to the 1970s, when the national political economy underwent major transformations, ending what is commonly called “the Golden Age” of (state) capitalism. Two major elements were financialization (the shift of investor preference from industrial production to so-called FIRE: finance, insurance, real estate) and the offshoring of production. The ideological triumph of “free market doctrines,” highly selective as always, administered further blows, as they were translated into tax and other fiscal policies, deregulation, rules of corporate governance linking huge CEO rewards to short-term profit, and other such policy decisions. The resulting concentration of wealth yielded greater political power, accelerating a vicious cycle that has led to extraordinary wealth for a fraction of 1 percent of the population, mainly, while for the large majority real incomes have virtually stagnated. In parallel, the cost of elections skyrocketed, driving both parties even deeper into corporate pockets.

A vicious cycle was set in motion. Wealth concentrated in the financial sector. The cost of campaigns escalated sharply, driving political leaders ever deeper into the pockets of wealthy backers, increasingly in financial institutions. Naturally, the funders were rewarded by the politicians they put into office, who instituted policies favorable to Wall Street: deregulation, tax changes, relaxation of rules of corporate governance and other measures that intensified the concentration of wealth and carried the vicious cycle forward. The new policies led very quickly to financial crises, unlike earlier years when New Deal legislation was in place and there were none. From the early Reagan years, each crisis has been more serious than the last, leading finally to the latest collapse in 2008. The government once again came to the rescue of Wall Street firms judged to be too big to fail—the implicit government insurance policy that ensures underpricing of risk—with leaders too big to jail.


pages: 196 words: 57,974

Company: A Short History of a Revolutionary Idea by John Micklethwait, Adrian Wooldridge

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affirmative action, barriers to entry, Bonfire of the Vanities, borderless world, business process, Corn Laws, corporate governance, corporate raider, corporate social responsibility, creative destruction, credit crunch, crony capitalism, double entry bookkeeping, Etonian, hiring and firing, industrial cluster, invisible hand, James Watt: steam engine, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, knowledge economy, knowledge worker, laissez-faire capitalism, manufacturing employment, market bubble, mittelstand, new economy, North Sea oil, race to the bottom, railway mania, Ronald Coase, Silicon Valley, six sigma, South Sea Bubble, Steve Jobs, Steve Wozniak, strikebreaker, The Nature of the Firm, The Wealth of Nations by Adam Smith, Thorstein Veblen, trade route, transaction costs, tulip mania, wage slave, William Shockley: the traitorous eight

Of course, managers had often been uppity people, inclined to know best. (Asked to slow down by the onboard merchants, one Dutch East India Company captain, Jacob van Heemskerck, barked back, “When we risk our lives, the Lords of the Company may damn well risk their ships.”)13 And, of course, theorists had always considered the separation of ownership from control. But Berle and Means were the first to identify corporate governance as a practical problem. Henceforth, rather than worrying about monopolistic entrepreneurs squeezing out smaller businesses, the authorities increasingly looked for ways to protect small investors from the power of unfettered managers. In 1933, the New York Stock Exchange finally required proper accounts for listed companies. The Securities Acts of 1933 and 1934 placed the fiduciary responsibility for reporting accurate information firmly with directors.

And while Western companies tended to be accountable to short-term investors, Japanese firms financed their expansion with loans from their keiretsu banks. As for profits, these were deemed less important than market share. Japanese firms were prepared to tolerate very low returns on investment. And they had the firm support of the Japanese government, which protected some of the weaker keiretsu industries, and also turned a blind eye both to corporate-governance questions and to antitrust considerations. In the late 1980s, this “long-term” stakeholder capitalism represented a real challenge to shareholder capitalism—not least because critics could also point to other apparent successes. South Korea’s chaebol, which had broadly copied the keiretsu system, were seen as the next threat. German companies were outperforming their Anglo-American peers in some high-profile industries, notably luxury cars.

During the 1980s, about half of America’s fifty states introduced laws that allowed managers to consider other stakeholders alongside shareholders. Connecticut even introduced a law that required them to do so. In Britain, the 1985 Companies Act took the same approach, forcing directors to consider the interests of employees as well as shareholders. If the main thrust of regulatory capitalism was social, there was also a corporate-governance element as well. Worried by the buccaneering spirit that deregulation had unleashed and by the piratical excesses of some corporate captains, governments sporadically tried to call the bosses of companies more firmly to account. In some cases, regulators breached the corporate veil—holding directors personally responsible for their firms’ actions. In Britain, for instance, the 1986 Insolvency Act made directors liable for the debts a company incurred after the point when they might reasonably be expected to have closed it down.

State-Building: Governance and World Order in the 21st Century by Francis Fukuyama

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Asian financial crisis, Berlin Wall, Bretton Woods, centre right, corporate governance, demand response, Doha Development Round, European colonialism, failed state, Fall of the Berlin Wall, Francis Fukuyama: the end of history, George Akerlof, Hernando de Soto, information asymmetry, liberal world order, Live Aid, Nick Leeson, Pareto efficiency, Potemkin village, price stability, principal–agent problem, rent-seeking, road to serfdom, Ronald Coase, structural adjustment programs, technology bubble, The Market for Lemons, The Nature of the Firm, transaction costs, Washington Consensus, Westphalian system

Individuals cooperate in organizations, but only because it is in their self-interest to do so. The divergence between individual and organizational interests led to a major branch of theory under the heading of principal-agent relationships that is 48 state-building today the overarching framework for understanding governance problems. Berle and Means (1932) recognized long ago that the divorce of ownership from management in modern corporations creates significant corporate governance problems. The owners, or principals, designate managers, or agents, to look after their interests, but the agents often respond to individual incentives that differ sharply from those of the principals. This is a problem with all forms of hierarchical organization and can exist at multiple levels of the hierarchy simultaneously. Jensen and Meckling (1976) introduced the concept of agency costs, which were the costs that principals had to pay to ensure that agents did their bidding.

These costs included the costs of monitoring agent behavior and bonding the agent and the residual losses that occurred when the agent acted in ways contrary to the interests of the firm. Jensen and Meckling assumed that it was primarily the residual risk-bearers or owners who did the disciplining and on this basis developed a sophisticated theory of capital structure and its relationship to corporate governance. Fama (1980) argued, however, that the residual risk-bearers were not the only source of agent discipline. Managers or agents monitored and disciplined each other’s behavior because agency relationships involved repeated interactions and there was a competitive market for managerial talent in which these evaluations would be important. Once principal-agent theory had been articulated with regard to private firms, it was relatively simple to adapt the framework to explain public sector behavior (Rose-Ackerman 1979; Weingast and Moran 1983; Weingast 1984; Moe 1984; Harriss et al. 1995).

That is, organizations are fundamentally understood as collections of individuals who learn to cooperate socially for reasons of individual self-interest. This perspective thus tends to emphasize conflicts of interests between members of the group (that is after all what principal-agent problems are all about) and to underplay concepts like group identity, socialization, leadership, and so forth. It is certainly worthwhile to try to understand problems of corporate governance or public corruption in principal-agent terms and to use this framework to design institutions that try to bring divergent incentives back into alignment. However, there are at least three basic reasons why there can be no optimal specification of formal institutions and thus no optimal form of organization, particularly for public sector agencies. First, the goals of many organizations are unclear.


pages: 827 words: 239,762

The Golden Passport: Harvard Business School, the Limits of Capitalism, and the Moral Failure of the MBA Elite by Duff McDonald

activist fund / activist shareholder / activist investor, Affordable Care Act / Obamacare, Albert Einstein, barriers to entry, Bayesian statistics, Bernie Madoff, Bob Noyce, Bonfire of the Vanities, business process, butterfly effect, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, Clayton Christensen, cloud computing, collateralized debt obligation, collective bargaining, commoditize, corporate governance, corporate raider, corporate social responsibility, creative destruction, deskilling, discounted cash flows, disintermediation, Donald Trump, family office, financial innovation, Frederick Winslow Taylor, full employment, George Gilder, glass ceiling, Gordon Gekko, hiring and firing, income inequality, invisible hand, Jeff Bezos, job-hopping, John von Neumann, Joseph Schumpeter, Kenneth Arrow, London Whale, Long Term Capital Management, market fundamentalism, Menlo Park, new economy, obamacare, oil shock, pattern recognition, performance metric, Peter Thiel, Plutocrats, plutocrats, profit maximization, profit motive, pushing on a string, Ralph Nader, Ralph Waldo Emerson, RAND corporation, random walk, rent-seeking, Ronald Coase, Ronald Reagan, Sand Hill Road, Saturday Night Live, shareholder value, Silicon Valley, Skype, Steve Jobs, survivorship bias, The Nature of the Firm, the scientific method, Thorstein Veblen, union organizing, urban renewal, Vilfredo Pareto, War on Poverty, William Shockley: the traitorous eight, women in the workforce, Y Combinator

More to the point, his “job” as a director of the company had been to prevent such fraud from occurring in the first place. One might think that being fined nearly half a million dollars21 for falling down on the job of being a board member would result in one losing one’s reputation as an “expert” on corporate governance. Instead, Faust decided to reward him for his international experience. “So the apparent message from Drew Faust is that being directly involved in an Enron-level scandal doesn’t count if it took place in a third world country,” wrote Susan Webber (’81) in a blog post titled “On the Continuing Oxymoron of Ethics at Harvard.” “She is happy to have what amounts to a corporate governance fraud as a face to the international business community. . . .”22 On the subject of individual entrepreneurship, it’s a sign that a professor has made it at HBS when they’re able to institutionalize their consulting by starting an actual company to handle all that outside business, with a hilarious number of them using the word institute in their name.

McKinsey only lectured at HBS that one time, but his namesake firm later became the most important corporate partner in the history of HBS, a distinction it still holds today. Another one HBS couldn’t hold on to: Adolf Berle, who lectured on industrial finance between 1924 and 1927, at which point he decamped for Columbia Law School. It was there that he wrote (with Gardiner Means) his seminal 1932 work on corporate governance, The Modern Corporation and Private Property. Business ethics was a different story. The question of how to incorporate ethics into the curriculum is one that dogs HBS to this day. For a variety of reasons—lack of faculty interest, lack of student interest, ongoing disagreement over how to teach it—ethics has never found true purchase at the School, amounting to nothing more than a sideshow on its best days and being utterly ignored on its worst.

In 2015, there remain serious problems in CEO compensation, and excessive pay is first and foremost among them. Jensen’s finance-based theory of the corporation has also lost significant credibility in the wake of the 2007–10 financial crisis. Specifically, observes the University of Michigan’s Jerry Davis, the ideas that financial markets are “informationally efficient” and that “it is appropriate for corporate governance mechanisms to guide corporations toward share price as their North Star” were revealed to be, well, misguided. “The merits of this view are debatable,” says Davis; “less so are the hazards to the economy when it is broadly accepted by executives, investors, and policymakers. Indeed, some would go so far as to argue that the financial view of the corporation helped create the crisis we are in now.


pages: 379 words: 113,656

Six Degrees: The Science of a Connected Age by Duncan J. Watts

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Berlin Wall, Bretton Woods, business process, corporate governance, Drosophila, Erdős number, experimental subject, fixed income, Frank Gehry, Geoffrey West, Santa Fe Institute, industrial cluster, invisible hand, Long Term Capital Management, market bubble, Milgram experiment, Murray Gell-Mann, Network effects, new economy, Norbert Wiener, Paul Erdős, peer-to-peer, rolodex, Ronald Coase, Silicon Valley, supply-chain management, The Nature of the Firm, The Wealth of Nations by Adam Smith, Toyota Production System, transaction costs, transcontinental railway, Vilfredo Pareto, Y2K

Social Forces, 53, 181–190 (1974). Affiliation Networks A good basic reference for affiliation networks is Wasserman, S., and Faust, K. Social Network Analysis: Methods and Applications (Cambridge University Press, Cambridge, 1994). Directors and Scientists Jerry Davis’s work on interlocking boards of corporate directors is presented in Davis, G. F. The significance of board interlocks for corporate governance. Corporate Governance, 4(3), 154–159 (1996). Davis, G. F., and Greve, H. R. Corporate elite networks and governance changes in the 1980s. American Journal of Sociology, 103(1), 1–37 (1997). And Mark Newman’s data on collaboration networks of scientists is Newman, M. E. J. The structure of scientific collaboration networks. Proceedings of the National Academy of Sciences, 98, 404–409 (2001). Or in (slightly exhausting) detail: Newman, M.

Breakdown of the Internet under intentional attack. Physical Review Letters, 86, 3682–3685 (2001). Coleman, J. S., Katz, E., and Menzel, H. The diffusion of an innovation among physicians. Sociometry, 20, 253–270 (1957). Davis, J. A. Structural balance, mechanical solidarity, and interpersonal relations. American Journal of Sociology, 68(4), 444–462 (1963). Davis, G. F. The significance of board interlocks for corporate governance. Corporate Governance, 4(3), 154–159 (1996). Davis, G. F., and Greve, H. R. Corporate elite networks and governance changes in the 1980s. American Journal of Sociology, 103(1), 1–37(1997). Davis, G. F., Yoo, M., and Baker, W. E. The small world of corporate elite (working paper, University of Michigan Business School, 2002). Degenne, A., and Forse, M. Introducing Social Networks (Sage, London, 1999).


pages: 320 words: 87,853

The Black Box Society: The Secret Algorithms That Control Money and Information by Frank Pasquale

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Affordable Care Act / Obamacare, algorithmic trading, Amazon Mechanical Turk, American Legislative Exchange Council, asset-backed security, Atul Gawande, bank run, barriers to entry, basic income, Berlin Wall, Bernie Madoff, Black Swan, bonus culture, Brian Krebs, call centre, Capital in the Twenty-First Century by Thomas Piketty, Chelsea Manning, Chuck Templeton: OpenTable, cloud computing, collateralized debt obligation, computerized markets, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, crowdsourcing, cryptocurrency, Debian, don't be evil, drone strike, Edward Snowden, en.wikipedia.org, Fall of the Berlin Wall, Filter Bubble, financial innovation, financial thriller, fixed income, Flash crash, full employment, Goldman Sachs: Vampire Squid, Google Earth, Hernando de Soto, High speed trading, hiring and firing, housing crisis, informal economy, information asymmetry, information retrieval, interest rate swap, Internet of things, invisible hand, Jaron Lanier, Jeff Bezos, job automation, Julian Assange, Kevin Kelly, knowledge worker, Kodak vs Instagram, kremlinology, late fees, London Interbank Offered Rate, London Whale, Marc Andreessen, Mark Zuckerberg, mobile money, moral hazard, new economy, Nicholas Carr, offshore financial centre, PageRank, pattern recognition, Philip Mirowski, precariat, profit maximization, profit motive, quantitative easing, race to the bottom, recommendation engine, regulatory arbitrage, risk-adjusted returns, Satyajit Das, search engine result page, shareholder value, Silicon Valley, Snapchat, Spread Networks laid a new fibre optics cable between New York and Chicago, statistical arbitrage, statistical model, Steven Levy, the scientific method, too big to fail, transaction costs, two-sided market, universal basic income, Upton Sinclair, value at risk, WikiLeaks, zero-sum game

As public outrage grew, Congress passed the Pure Food and Drug Act of 1906, which set the stage for the food and drug regulations of today. If a would-be Sinclair tried to document today’s food horror stories, there’s a good chance he’d be fi ned, jailed, or even labeled a terrorist. In Iowa, Utah, and Missouri, undercover investigations of factory farms are illegal. Nearly every major agricultural state has proposed similar legislation. A shadowy corporate-government partnership known as the American Legislative Exchange Council (ALEC) has proposed “The Animal and Ecological Terrorism Act” to deter filming that is designed to “defame” such facilities or their owners.176 Any violators would end up on a “terrorist registry.” Good luck fi nding out exactly how ALEC came to propose that law: a Washington Post reporter who tried to attend a gathering found that its “business meetings are not open.”177 Police escorted him away, and if he had persisted, who knows—maybe he’d have been labeled a terrorist, too.

Financial reform planners early in Franklin Roosevelt’s administration envisioned agencies intended to “direct the flow of new investment in private industry” toward socially useful projects, and away from the kind of self-dealing common in the Roaring Twenties (and the more recent housing bubble).71 Rexford Tugwell wanted a commission to “encourage or discourage the flow of capital into various industries.”72 Considering the shameful state of America’s roads, bridges, and public transit today, would it be too much to ask the Fed to purchase “infrastructure bonds” to complement its vast holdings of mortgage-backed securities?73 FDR’s advisers also took a direct approach to financial stability; the corporate governance expert Adolf Berle advocated for an agency to “exercise a real control over undue expansion of groups of credit instruments.”74 His proposal is as timely now as it was then.75 The dynamic of circularity teaches us that there is no stable, static equilibrium to be achieved between regulators and regulated. The government is either pushing industry to realize some public values in its activities (say, by respecting privacy or investing in sustainable growth), or industry is pushing its regulators to promote its own interests.76 Many of the black box dynamics we saw unleashed in finance arose out of failed efforts to fudge this tension— such as the credit agencies’ role as a “soft” regulator, or the government’s wink-wink, nod-nod (non)assurances regarding its backing of Fannie and Freddie and massive financial institutions.77 That pattern continues to this day: the authors of Dodd-Frank say their bill solved the “too big to fail” problem, but Richard Fisher, president of the Federal Reserve Bank of Dallas, says it is all but inevitable government will bail out a massive financial firm if too many of its bets go TOWARD AN INTELLIGIBLE SOCIETY 211 bad.78 Credit ratings reflect the same assumption: megabanks’ risks are too complex to quantify, but the smart money assumes government will step in the moment they are in danger.

., 467 U.S. 986 (1984); Pamela Samuelson, “Information as Property: Do Ruckelshaus and Carpenter Signal a Changing Direction in Intellectual Property Law?,” Catholic University Law Review 38 (1989): 365–400. 40. For background on (and critique of ) the role of the “sophisticated investor” construct in fi nance theory, see Jennifer Taub, “The Sophisticated Investor and the Global Financial Crisis,” in Corporate Governance Failures: The Role of Institutional Investors in the Global Financial Crisis, ed. James P. Hawley, Shyam J. Kamath, and Andrew T. Williams (Philadelphia: University of Pennsylvania Press, 2011), 191. (reliance “upon the sophisticated investor ignores reality; the entities the law deems to meet the defi nition are largely neither sophisticated enough to match the complexity of the instruments or lack of data nor [are they] the actual investors who have placed their capital at risk.”) 41.


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The Best Way to Rob a Bank Is to Own One: How Corporate Executives and Politicians Looted the S&L Industry by William K. Black

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accounting loophole / creative accounting, affirmative action, Andrei Shleifer, business climate, cognitive dissonance, corporate governance, corporate raider, Donald Trump, fear of failure, financial deregulation, friendly fire, George Akerlof, hiring and firing, margin call, market bubble, money market fund, moral hazard, offshore financial centre, Ponzi scheme, race to the bottom, Ronald Reagan, short selling, The Market for Lemons, transaction costs

This could have reduced the ongoing wave of accounting scandals. 13. CONTROL FRAUDS DEFEAT CORPORATE GOVERNANCE PROTECTIONS AND REFORMS. The S&L debacle should have taught us that control frauds were able to defeat a broad range of corporate governance principles. Control frauds control the election of the board of directors. They pick outside directors who are the equivalent of inside directors. Efforts to improve corporate governance may be desirable for other reasons (though we must not lose sight of the cost), but they are unlikely to be effective against control fraud, and we certainly should not rely on their effectiveness. The new Sarbanes-Oxley reform legislation primarily relies on improving corporate governance. Since control frauds have caused the ongoing financial scandals, that is discouraging.

In Contemporary Issues in Crime and Criminal Justice: Essays in Honor of Gilbert Geis, ed. Henry N. Pontell and David Shichor, 67–80. Upper Saddle River, N.J.: Prentice Hall. ———. 2001. “Control Fraud and Control Freaks.” In Contemporary Issues in Crime and Criminal Justice, Henry N. Pontell and David Shichor, eds. Upper Saddle River, N.J.: Prentice Hall. ———. 2003. “Reexamining the Law-and-Economics Theory of Corporate Governance.” Challenge 46 (2):22–40. Black, William K., Kitty Calavita, and Henry N. Pontell. 1995. “The Savings and Loan Debacle of the 1980’s: White-Collar Crime or Risky Business?” Law and Policy 17:23–55. Bolt, Robert. 1990. A Man for All Seasons. New York: Vintage. Brookes, Warren. 1987. “Knee-deep in S&Leaze?” Washington Times. July 9: D1. Calavita, Kitty, Henry N. Pontell, and Robert H. Tillman. 1997.


pages: 461 words: 128,421

The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street by Justin Fox

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activist fund / activist shareholder / activist investor, Albert Einstein, Andrei Shleifer, asset allocation, asset-backed security, bank run, beat the dealer, Benoit Mandelbrot, Black-Scholes formula, Bretton Woods, Brownian motion, capital asset pricing model, card file, Cass Sunstein, collateralized debt obligation, complexity theory, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, discovery of the americas, diversification, diversified portfolio, Edward Glaeser, Edward Thorp, endowment effect, Eugene Fama: efficient market hypothesis, experimental economics, financial innovation, Financial Instability Hypothesis, fixed income, floating exchange rates, George Akerlof, Henri Poincaré, Hyman Minsky, implied volatility, impulse control, index arbitrage, index card, index fund, information asymmetry, invisible hand, Isaac Newton, John Meriwether, John Nash: game theory, John von Neumann, joint-stock company, Joseph Schumpeter, Kenneth Arrow, libertarian paternalism, linear programming, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, market bubble, market design, Myron Scholes, New Journalism, Nikolai Kondratiev, Paul Lévy, Paul Samuelson, pension reform, performance metric, Ponzi scheme, prediction markets, pushing on a string, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Richard Thaler, risk/return, road to serfdom, Robert Bork, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, shareholder value, Sharpe ratio, short selling, side project, Silicon Valley, South Sea Bubble, statistical model, The Chicago School, The Myth of the Rational Market, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, Thorstein Veblen, Tobin tax, transaction costs, tulip mania, value at risk, Vanguard fund, Vilfredo Pareto, volatility smile, Yogi Berra

Most critics of corporate America, meanwhile, came from the political left—people such as John Kenneth Galbraith and Ralph Nader—and weren’t keen to embrace Wall Street raiders. That left the field to Henry Manne, a 1952 graduate of the University of Chicago Law School. He had been through the usual conversion experience there, arriving with plans to become a labor union lawyer and emerging three years later a “confirmed free marketer.” As a young legal scholar his interest in corporate governance did lead him down some interesting paths, among them some previously trod by Berle—a man his Chicago professors dismissed as a “nut.” Manne corresponded with Berle and became an admirer of Wolfson and the other proxyteers, whom he saw as crucial to resolving Berle’s ownership-and-control dilemma. After touching on this idea in several law journal articles, he attacked it head-on in the Journal of Political Economy in 1965 in what would become a landmark essay.

It’s rabbi economics.2 It was a criticism similar to Merton Miller’s line about the need to focus on “pervasive forces” rather than anomalous quirks. Young Shleifer took it to heart. “He was right,” he said years later. “It is important to focus on pervasive market forces.” It became Shleifer’s quest to figure out just what the pervasive market forces were that allowed prices to go wrong and stay that way. He had other quests, too. Shleifer “shaped the basic paradigm” in the study of corporate governance, the economics of transition (from communism to market economies), and macroeconomics. At least, that’s what one of his former MIT professors said when Shleifer won the John Bates Clark Medal in 1999 as the top American economist under forty.3 Shleifer also ran a U.S.-government-funded operation that advised the Russian government on economic matters in the early 1990s, and his conduct there later landed him in legal trouble and played a role in his mentor Larry Summers’s early exit from Harvard’s presidency.

Hessen, it should be noted, thinks these legal changes were mere formalities because businessmen had already figured out ways to circumvent the post–South Sea ban on corporations. 3. A. A. Berle Jr., “Management Power and Stockholders’ Property,” Harvard Business Review 5 (1927): 424. There is a train of revisionist legal scholarship, summarized in Stephen M. Bainbridge, “The Politics of Corporate Governance,” Harvard Journal of Law and Public Policy (Summer 1995): 671–734, that argues that the separation of ownership and control was present long before the 1920s. Yet another argument, outlined to me by Henry Manne in an interview, is that Berle’s claims were vastly premature and most corporations in the 1920s were still controlled by a few big shareholders. But I’m sticking with the standard account because the 1920s is when people like Berle began to notice and write about the separation of ownership and control. 4.


pages: 654 words: 120,154

The Firm by Duff McDonald

Asian financial crisis, borderless world, collective bargaining, commoditize, conceptual framework, corporate governance, creative destruction, credit crunch, family office, financial independence, Frederick Winslow Taylor, income inequality, invisible hand, Jeff Bezos, Joseph Schumpeter, laissez-faire capitalism, Mahatma Gandhi, new economy, pets.com, Ponzi scheme, Ralph Nader, risk tolerance, risk-adjusted returns, shareholder value, Silicon Valley, Steve Jobs, supply-chain management, The Nature of the Firm, young professional

One of the main conclusions of FSI was that McKinsey must restrict client engagements to the very top rungs of management. If they allowed their work to slip down to the middle rungs, the consultants reasoned, the money they’d make would come at the expense of their hard-won reputation for being the confidants of CEOs. This was a demonstrative reinforcement of Boweresque values. The FSI also reiterated McKinsey’s commitment to loose corporate governance, despite the firm’s growing size. This was also true to the firm’s tradition of giving consultants the freedom to exercise their entrepreneurial instincts. At the margins, however, change was creeping in. Usually it had to do with money. One result of FSI was the establishment of new “fee mechanisms” to enable the consultants to work with small but fast-growing companies. In lieu of its customarily high rates, the firm started taking equity in clients, something Marvin Bower had considered unwise.

But even that was short-lived pain: By 2005 the number of McKinsey mentions in BusinessWeek had returned to pre-Enron levels.29 McKinsey consultants even showed defiance in the face of all the criticism. When they were offered a chance to remove any of their favorable Enron citations from the company’s website, not a single consultant did so.30 The most noticeable change in the McKinsey culture—possibly the only one—was a pronounced increase in papers and studies produced on the issue of effective corporate governance.31 “The major barrier to an Enron-like scandal damaging the reputation of the consulting industry at large is that the selection and management of consultants is seen, by clients, to be their responsibility,” analyst Fiona Czerniawska wrote in her 2002 report, “Consulting on the Brink.”32 There was that “perfect business” thing again: You’re right when you’re right, and they’re wrong when you’re wrong.

[whereas] in the U.S. and Europe, nearsightedness is the norm.”4 Barton cited McKinsey research that has found that 70 to 90 percent of a company’s market value is related to cash flows expected three or more years into the future. “If the vast majority of most firms’ value depends on results more than three years from now, but management is preoccupied with what’s reportable three months from now, then capitalism has a problem,” he wrote. He even dared touch the third rail of the corporate governance debate, excessive CEO pay, and suggested a number of changes to current approaches, including the idea of evaluating executives over rolling three- or five-year time frames. As one part of his own long-term planning, Barton has nudged the firm toward investments in so-called proprietary knowledge that might not pay off for three, five, or even seven years. One example: the firm’s Organizational Health Index (OHI), which allows clients to benchmark any number of elements of organizational effectiveness—such as employee satisfaction, innovation, or company direction—against a proprietary database of 600-plus clients and over 280,000 employees.


pages: 278 words: 82,069

Meltdown: How Greed and Corruption Shattered Our Financial System and How We Can Recover by Katrina Vanden Heuvel, William Greider

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Asian financial crisis, banking crisis, Bretton Woods, capital controls, carried interest, central bank independence, centre right, collateralized debt obligation, conceptual framework, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, declining real wages, deindustrialization, Exxon Valdez, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, fixed income, floating exchange rates, full employment, housing crisis, Howard Zinn, Hyman Minsky, income inequality, information asymmetry, John Meriwether, kremlinology, Long Term Capital Management, margin call, market bubble, market fundamentalism, McMansion, money market fund, mortgage debt, Naomi Klein, new economy, offshore financial centre, payday loans, pets.com, Plutocrats, plutocrats, Ponzi scheme, price stability, pushing on a string, race to the bottom, Ralph Nader, rent control, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, sovereign wealth fund, structural adjustment programs, The Great Moderation, too big to fail, trade liberalization, transcontinental railway, trickle-down economics, union organizing, wage slave, Washington Consensus, women in the workforce, working poor, Y2K

So maybe an independent central bank isn’t such a good thing after all. Or maybe the importance of the central bank is exaggerated. Unlike Britain and the United States, which suffer from loosely regulated financial systems and a shoot-from-the-hip stock market mentality, Japan and Germany have rather tightly regulated systems in which stock markets play a relatively unimportant role in both investment finance and corporate governance. Compared with these broader financial structures, the central bank’s (in)dependence isn’t quite so important. Populist critiques of the Fed tend to concentrate excessively on its autonomous powers while overlooking the influence of the financial markets on the central bankers; the Fed follows interest rate trends as well as leading them. For example, creditors began selling their bonds, driving up long-term interest rates, several months before the Fed jacked up the short-term rates last February.

Still, he is strong and confident. That’s the scary part. Bush gets a cheerleader to help cement his ideas of individualism, from more tax cuts for the rich to privatization of anything politically viable at the moment. In a highly touted post-Enron-implosion speech at the National Press Club in mid-2002, Paulson urged reform in the financial system in three areas: accounting policy, standards of corporate governance and conflict of interest. “Conflicts are a fact of life in many, if not most, institutions, ranging from the political arena and government to media and industry,” he said. “The key is how we manage them.” Or how we ignore them. The question isn’t how it’s a conflict of interest for Paulson to preside over our country’s economy but how it’s not. According to the first general statement laid out in the “Standards of Ethical Conduct for Employees of the Executive Branch”: “Public service is a public trust requiring employees to place loyalty in the constitution, the laws and ethical principles above private gain.”

The top one-hundredth of 1 percent of America’s taxpayers have seen their collective income quadruple, after inflation, over the past two decades. Corporate executives account for about a fifth of that income. How have CEOs engineered their awesome take-homes? They essentially pay themselves. They sit on one another’s corporate boards and rubber-stamp executive pay plans that come from consultants who know where their bread is buttered. Democratizing corporate governance could help end this enabling. • Give shareholders a “say on pay.” The House of Representatives voted last year to give shareholders the right to vote on executive compensation. But these votes would be advisory only, and such nonbinding votes—in Britain, for instance—haven’t done much to break executive pay spirals. Still, the prospect of shareholder no votes could dampen the willingness of corporate boards to keep signing blank checks.


pages: 306 words: 78,893

After the New Economy: The Binge . . . And the Hangover That Won't Go Away by Doug Henwood

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accounting loophole / creative accounting, affirmative action, Asian financial crisis, barriers to entry, borderless world, Branko Milanovic, Bretton Woods, capital controls, corporate governance, corporate raider, correlation coefficient, credit crunch, deindustrialization, dematerialisation, deskilling, ending welfare as we know it, feminist movement, full employment, gender pay gap, George Gilder, glass ceiling, Gordon Gekko, greed is good, half of the world's population has never made a phone call, income inequality, indoor plumbing, intangible asset, Internet Archive, job satisfaction, joint-stock company, Kevin Kelly, labor-force participation, liquidationism / Banker’s doctrine / the Treasury view, manufacturing employment, means of production, minimum wage unemployment, Naomi Klein, new economy, occupational segregation, pets.com, profit maximization, purchasing power parity, race to the bottom, Ralph Nader, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, Silicon Valley, Simon Kuznets, statistical model, structural adjustment programs, Telecommunications Act of 1996, telemarketer, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, total factor productivity, union organizing, War on Poverty, women in the workforce, working poor, Y2K, zero-sum game

Portfolio flows are also highly concentrated, confined mainly to countries that provincial U.S.-based portfoHo managers have heard of Smaller and poorer countries, Hke those of the Caribbean, Africa, or South Asia, are largely excluded from this circuit of private capital flows. It's not just American financial structures that Washington has been promoting—it's the corporate governance model as well. Though it now seems hilarious after Ken Lay and Gary Winnick, the U.S. Treasury and its effective subsidiary, the IMF, blamed the 1997-98 Asian crisis on poor corporate governance practices and a lack of transparency. U.S. pundits also trace Japan's troubles to similar faults. What this means is that Asian corporations typically have intimate ties to one another, to banks, and to governments that are profoundly different from the system prevaiUng in the U.S., where stockholdings are widely dispersed among thousands, even millions, of holders, and governments are much less involved in corporate affairs.

See Federal Reserve Chandler, Alfred, 167 Chase Manhattan Bank, 164 children, having, effects on pay, 96—97 China, 238 Chinese wall, 195 Chopra, Deepak, 26 Citizens Trade Campaign, 170 class war, 208-209,227 Clinton administration, financial diplomacy, 218 CNBC, 187,189-190 Cold War, 205 commodification, 29 Commodity Futures Trading Commission, 200 Communist Manifesto, 36 computers output of, 58-61 price indexes, 44, 52-54 support costs, 60-61 Conference Board, 112, 207 conflict as synergy, 197—200 Congressional Budget Office, 89 consumer price index history and politics, 205—206 quahty changes and, 43 redefinition, fortunate effects, 85, 233 consumption as evil, 165 role in 1990s boom, 5 corporate America's IQ, 21—22 corporations governance, 223—224 Enron and, 34—35 history, 211-217 as populists' demons, 167 profitabihty, 203-204 corporatism, 139-143 Cowell, Alan, 39 Cox,W. Michael, 114 Cramer, James, 31 creativity, unwelcome by employers, 76 cronyism, 224 Current Population Survey, 89, 115 customer service, stinkiness of, 55—56 Davos Man, 177 day trading, 190 debt, consumer, 5 debt crisis, 182,209,221, 222 decommodification, 136 deflation, 228 delinking, 170 democracy, market, 22-24 depreciation, 59—60 deregulation, 152 derivatives, 192 development finance, changes in, 222 differentiahst racism, 172 DiFranco,Ani, 183 263 direct investment, 176—177 discrimination, 94—101 New Economy and, 101-103 international comparisons, 101-102 diversity, lack of, 233 dividends, source of, 203 domestic labor, 29 Dornbusch, Rudi, 3 downsizing, 215 drug development, ad agencies and, 235 Dudley, Barbara, 162 Durning.Alan, 166 Earned Income Tax Credit, 113 earnings.


pages: 283 words: 73,093

Social Democratic America by Lane Kenworthy

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affirmative action, Affordable Care Act / Obamacare, barriers to entry, basic income, Celtic Tiger, centre right, clean water, collective bargaining, corporate governance, David Brooks, desegregation, Edward Glaeser, endogenous growth, full employment, Gini coefficient, hiring and firing, Home mortgage interest deduction, illegal immigration, income inequality, invisible hand, Kenneth Arrow, labor-force participation, manufacturing employment, market bubble, minimum wage unemployment, new economy, postindustrial economy, purchasing power parity, race to the bottom, rent-seeking, rising living standards, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, school choice, shareholder value, sharing economy, Skype, Steve Jobs, too big to fail, Tyler Cowen: Great Stagnation, union organizing, universal basic income, War on Poverty, working poor, zero day

But in the 2000s the bloom fell off the rose.56 The early years of recovery after the 2001 recession featured feeble job growth, and things didn’t improve much after that. By the peak year of the 2000s business cycle, 2007, the employment rate had not yet reached its prior peak.57 And during the subsequent economic crash nearly all the progress of the 1980s and 1990s was erased. What happened? We don’t know. It may be that economic and institutional forces—strong competition, the shareholder value orientation in corporate governance, Wall Street’s appetite for downsizing, weakened unions—have made management reluctant to hire.58 Perhaps it was manufacturing jobs fleeing to China and service jobs shifting to India.59 Or perhaps the computer-robotics revolution finally began to hit full force.60 Maybe it was a combination of these and other factors. Whatever the cause, it doesn’t bode well for employment going forward.

Figure 4.7 shows the average level of government revenues (horizontal axis) and the average catch-up-adjusted economic growth rate (vertical axis) in these countries between 1979 and 2007. There is no association between the size of government and economic growth. More detailed cross-country studies have reached a similar conclusion.25 Can Our Economy Thrive with Less Institutional Coherence? Though I favor significant changes to America’s social programs, I see a need for only limited restructuring of other economic institutions, such as our financial system, corporate governance, labor relations, and so on. But might a shift toward more generous public social programs hurt the economy by disrupting the coherence of its current institutions and policies? An influential perspective on differences among the world’s rich nations, known as the varieties of capitalism approach, contends that economies perform better to the extent that their institutions and policies are coherent.26 According to Peter Hall and David Soskice, those policies and institutions aren’t drawn up in advance by a master planner, but because of selection pressures they end up fitting together.

Hall and Daniel W. Gingerich, “Varieties of Capitalism and Institutional Complementarities,” British Journal of Political Science, 2009. The correlation is .01 (with Ireland and Norway excluded). “Asl” is Australia; “Aus” is Austria. Peter Hall and Daniel Gingerich have created a measure of institutional coherence for twenty rich nations, focusing on two economic spheres: labor relations and corporate governance. Nations score higher to the extent that their institutions and policies are coherent within each sphere and consistent across both spheres.28 Figure 4.8 shows countries’ institutional coherence and their rates of growth of GDP per capita from 1979 to 2007 (adjusted for catch-up). There is no indication of the hypothesized positive association between coherence and economic growth. All along the coherence spectrum—at the high end, in the middle, and at the low end—there are some fast-growing nations and some slow-growing ones.29 The hypothesis that institutional coherence is good for economic growth makes sense.


pages: 224 words: 13,238

Electronic and Algorithmic Trading Technology: The Complete Guide by Kendall Kim

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algorithmic trading, automated trading system, backtesting, commoditize, computerized trading, corporate governance, Credit Default Swap, diversification, en.wikipedia.org, family office, financial innovation, fixed income, index arbitrage, index fund, interest rate swap, linked data, market fragmentation, money market fund, natural language processing, quantitative trading / quantitative finance, random walk, risk tolerance, risk-adjusted returns, short selling, statistical arbitrage, Steven Levy, transaction costs, yield curve

Why Stock Exchanges Are Scrambling to Consolidate,’’ Knowledge@Wharton, March 2006. Alternative Execution Venues 45 investors have pressed for greater computerization and a move away from human intervention found on traditional trading floors.4 Monopoly In a monopoly, the necessary competitive pressures are absent. A monopolist will potentially provide an inferior product, and provide shoddy rules of corporate governance and disclosure. A rational monopolist is expected to offer the same corporate governance and disclosure rules as a competitive exchange but offer the services at a higher price. The repeal of Rule 390 has led the way for electronic communication networks (ECN). The exchanges have traditionally operated as a nonprofit entity owned by its member brokers. The increasing pressure from ECNs has shifted the exchanges toward demutualization and for-profit status.

When exchanges are the principal source of disclosure rules in a nonprofit environment, the exchanges have less of an incentive to vigorously investigate alleged violations for a listed company, because of fear that the company will leave to be listed on a competing exchange. The incumbent exchange will most likely back down, unwilling to risk losing a listed company. Competition between exchanges for listings will lead to better regulatory enforcement.6 Externalities The exchange does not sell its services or have the incentive to disclose its corporate governance rules to third parties that happen to trade in a 4 5 6 Marshall E. Blume, ‘‘LSE, NYSE, OMX, NASDAQ, Euronext . . . Why Stock Exchanges Are Scrambling to Consolidate,’’ Knowledge@Wharton, March 2006. Paul G. Mahoney, ‘‘Public and Private Rule Making in Securities Markets,’’ Cato Institute Policy Analysis No. 498, November 2003: 6. Paul G. Mahoney, ‘‘Public and Private Rule Making in Securities Markets,’’ Cato Institute Policy Analysis No. 498, November 2003: 7–8. 46 Electronic and Algorithmic Trading Technology particular stock.


pages: 892 words: 91,000

Valuation: Measuring and Managing the Value of Companies by Tim Koller, McKinsey, Company Inc., Marc Goedhart, David Wessels, Barbara Schwimmer, Franziska Manoury

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activist fund / activist shareholder / activist investor, air freight, barriers to entry, Basel III, BRICs, business climate, business process, capital asset pricing model, capital controls, Chuck Templeton: OpenTable, cloud computing, commoditize, compound rate of return, conceptual framework, corporate governance, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, discounted cash flows, distributed generation, diversified portfolio, energy security, equity premium, fixed income, index fund, intangible asset, iterative process, Long Term Capital Management, market bubble, market friction, meta analysis, meta-analysis, Myron Scholes, negative equity, new economy, p-value, performance metric, Ponzi scheme, price anchoring, purchasing power parity, quantitative easing, risk/return, Robert Shiller, Robert Shiller, shareholder value, six sigma, sovereign wealth fund, speech recognition, survivorship bias, technology bubble, time value of money, too big to fail, transaction costs, transfer pricing, value at risk, yield curve, zero-coupon bond

investors from the United States do not require the foreign companies in which they want to invest to be listed in the United States.37 There is no impact on liquidity, as cross-listed shares of European companies in the United States— American depositary receipts (ADRs)—typically account for less than 3 percent of these companies’ total trading volumes. Corporate governance standards across the developed world have converged with those in the United States and the United Kingdom. There is hardly any benefit from better access to capital, given that three-quarters of the U.S. cross-listings of companies from the European Union have never involved raising any new capital in the United States.38 For companies from the emerging world, however, the story might be different. These companies might benefit from access to new equity and more stringent corporate governance requirements through cross-listings in U.S. or UK equity markets.39 Stock Splits In the United States alone, each year hundreds of companies increase their number of shares through a stock split to bring a company’s share price back 37 For example, CalPERS, a large U.S. investor, has an international equity portfolio of around 2,400 companies, but less than 10 percent of them have a U.S. cross-listing. 38 Based on 420 depositary receipt issues on the New York Stock Exchange, NASDAQ, and American Stock Exchange from January 1970 to May 2008.

But a host of other calamities, from the rise and fall of business conglomerates in the 1970s to the collapse of Japan’s economy in the 1990s to the Internet bubble, can all to some extent be traced to a misunderstanding or misapplication of this guiding principle. Today these accumulated crises have led many to call into question the foundations of shareholder-oriented capitalism. Confidence in business has tumbled.2 Politicians and commentators push for more regulation and fundamental changes in corporate governance. Academics and even some business leaders have called for companies to change their focus from increasing shareholder value to a broader focus on all stakeholders, including customers, employees, suppliers, and local communities. At the extremes, some have gone so far as to argue that companies should bear the responsibility of promoting healthier eating and other social issues. Many of these impulses are naive.

But it’s management’s and the board’s task to demonstrate that courage, despite the short-term consequences, in the name of value creation for the collective benefit of all present and future shareholders. CAN STAKEHOLDER INTERESTS BE RECONCILED? Much recent criticism of shareholder-oriented capitalism has called on companies to focus on a broader set of stakeholders beyond just its shareholders. It’s a view that has long been influential in continental Europe, where it is frequently embedded in corporate governance structures. And we agree that for most companies anywhere in the world, pursuing the creation of long-term shareholder value requires satisfying other stakeholders as well. You can’t create long-term value without happy customers, suppliers, and employees. We would go even further. We believe that companies dedicated to value creation are healthier and more robust—and that investing for sustainable growth also builds stronger economies, higher living standards, and more opportunities for individuals.


pages: 695 words: 194,693

Money Changes Everything: How Finance Made Civilization Possible by William N. Goetzmann

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Albert Einstein, Andrei Shleifer, asset allocation, asset-backed security, banking crisis, Benoit Mandelbrot, Black Swan, Black-Scholes formula, Bretton Woods, Brownian motion, capital asset pricing model, Cass Sunstein, collective bargaining, colonial exploitation, compound rate of return, conceptual framework, corporate governance, Credit Default Swap, David Ricardo: comparative advantage, debt deflation, delayed gratification, Detroit bankruptcy, disintermediation, diversified portfolio, double entry bookkeeping, Edmond Halley, en.wikipedia.org, equity premium, financial independence, financial innovation, financial intermediation, fixed income, frictionless, frictionless market, full employment, high net worth, income inequality, index fund, invention of the steam engine, invention of writing, invisible hand, James Watt: steam engine, joint-stock company, joint-stock limited liability company, laissez-faire capitalism, Louis Bachelier, mandelbrot fractal, market bubble, means of production, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, new economy, passive investing, Paul Lévy, Ponzi scheme, price stability, principal–agent problem, profit maximization, profit motive, quantitative trading / quantitative finance, random walk, Richard Thaler, Robert Shiller, Robert Shiller, shareholder value, short selling, South Sea Bubble, sovereign wealth fund, spice trade, stochastic process, the scientific method, The Wealth of Nations by Adam Smith, Thomas Malthus, time value of money, too big to fail, trade liberalization, trade route, transatlantic slave trade, transatlantic slave trade, tulip mania, wage slave

Using the new financial engineering of Exchange Alley and his own economic analysis of the role of money in the economy, he had effectively privatized the financial operations of France and put them into the hands of the public through the issuance of public shares of stock. He had replaced a depleted currency based on scarce silver specie with fiat money that could respond to market demand. He had created a corporate governance structure that had the potential to respond strategically to France’s competitors in the rush to globalization. He had also created a world that depended fundamentally on the financial market. MERES ET FILLES Law’s share issues were cleverly designed. The shares issued in June 1719 were offered on an installment plan of 10% paid in capital per month, thus attracting investors of lower means and broadening the capital market clientele.15 The Banque Royale loaned money against company shares, thus serving as what today would be called a “repo” facility, which ensured liquidity to investors.

The markets boomed with the prospects of new businesses like the rubber trade and crashed with shocks to the banking and financial systems. The Chinese markets served an expanding based of individual investors. Chinese entrepreneurs managed their way through a multicultural world of foreign competition, wars, and the complexities of an eroding nation-state to lead China into the modern world economy. By 1905, Chinese officials had adopted corporate governance and a sophisticated corporate legal code that formed the basis for the transition to successful private corporate ownership. However, China’s Communist Revolution in 1949 reinterpreted this success story in stark terms as colonial exploitation by the capitalistic West. There is a germ of truth in their revisionist history. China’s financial modernization resulted from the weakening of the central government and erosion of sovereignty.

This joint government-merchant structure was borrowed from the organization of the Chinese salt monopoly, for which merchants provided capital, and government officials controlled production quotas.7 This structure reflected the age-old ideal of an enlightened official governing a profit-making business to ensure that public interests were properly represented. Of course, we have seen the deeper roots of this kind of joint public-private structure earlier in Chinese history (see Chapter 9). It can rightly be regarded as a financial innovation—a new re-configuration of corporate governance that sought to reconcile the traditional Chinese governmental control and value extraction with modern corporate forms. The question is whether this new experiment would succeed. A couple of problems emerged. First, the guandu shangban structure requires an enlightened, as opposed to a self-interested, government official. When this condition is not met, the structure is ripe for exploitation.


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The Crisis of Crowding: Quant Copycats, Ugly Models, and the New Crash Normal by Ludwig B. Chincarini

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affirmative action, asset-backed security, automated trading system, bank run, banking crisis, Basel III, Bernie Madoff, Black-Scholes formula, buttonwood tree, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, collective bargaining, corporate governance, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, delta neutral, discounted cash flows, diversification, diversified portfolio, family office, financial innovation, financial intermediation, fixed income, Flash crash, full employment, Gini coefficient, high net worth, hindsight bias, housing crisis, implied volatility, income inequality, interest rate derivative, interest rate swap, John Meriwether, labour mobility, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low skilled workers, margin call, market design, market fundamentalism, merger arbitrage, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mortgage debt, Myron Scholes, negative equity, Northern Rock, Occupy movement, oil shock, price stability, quantitative easing, quantitative hedge fund, quantitative trading / quantitative finance, Ralph Waldo Emerson, regulatory arbitrage, Renaissance Technologies, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, Sharpe ratio, short selling, sovereign wealth fund, speech recognition, statistical arbitrage, statistical model, survivorship bias, systematic trading, The Great Moderation, too big to fail, transaction costs, value at risk, yield curve, zero-coupon bond

Economy Before, During, and After the Financial Crisis The Housing Market Unemployment The Level of Prosperity Inflation or Deflation? The Ballooning Debt The Banks Small Business Borrowing The Markets Appendix L: The Policy Reaction I: If You're Dodd, I'll be Frank Systemic Risk The Banking Industry Derivatives Hedge Funds and Private Equity Securitization Credit Rating Agencies Insurance Industry Consumer and Investment Protection Corporate Governance and Executive Compensation Last Thoughts Appendix M: The Policy Reaction II: Basel's Back: Three Strikes and You're Out Increased Capital Requirements for Banks New Liquidity Requirements Other Changes Some Thoughts on Basel III Appendix N: The Policy Reaction III: The Federal Reserve The Fed’s Business Unconventional Policies Quantitative Easing The Federal Hedge Fund Appendix O: The Policy Reaction IV: Fiscal Stimulus and Housing Capital Injections into the Banking System Supporting the Housing Market Stimulating the Economy Appendix P: A Simple Model of Banks A Simple Bank Credit Risk Management A Bank and Mark-to-Market Accounting Simple Answer to Puzzles Glossary Bibliography About the Author Index Additional Praise for The Crisis of Crowding “What causes systemic risk in economic markets?

The Real Costs of the Financial Crisis People where you live, grow five thousand roses in one garden … yet they don’t find what they’re looking for… —The Little Prince Many people measure the real cost of the 2008 financial crisis as the decrease in the net worth of U.S. households. The real question is this: How far did this shock to the financial system take us from where we might have been without the financial crisis? Many corporations, government, and citizens are obsessed with growth, an obsession that often does more harm than good. Sometimes growth stagnates, and spurring growth with low interest rates and implicit housing subsidies can create a house of cards that eventually collapses. This is part of what happened during the fairy-tale decade. In 2000, household net worth was $43 trillion (see Table 19.2).6 Household wealth is mainly the combined value of a home and stock market investments.

Businesses need resolutions to deficit reduction, corporate tax changes, derivatives-trading regulations, and whistleblower rules, but political gridlock, bureaucratic inertia, and inadequate resources stand in the way.20 The policy makers have paralyzed the market system. It may sometimes be better to make no regulations at all than to continue stalling the system. The CFTC handled as many as six new rules per week in 2011. That’s the number it used to handle in an entire year. SEC Chairman Mary Schapiro summarized the clog when asked about corporate governance: “When we catch our breath from our Dodd-Frank responsibilities…” No matter what economic choices we make, we will face trade-offs. We may ultimately choose a fast-paced, free system that produces innovation and growth, but also some big troughs. Or some level of regulation may offer a better trade-off between large recessions and growth. A small amount of directed regulation would have prevented the entire financial crisis of 2008, in particular limiting the amount of leverage that individuals and institutions could take on.


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Beautiful security by Andy Oram, John Viega

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Albert Einstein, Amazon Web Services, business intelligence, business process, call centre, cloud computing, corporate governance, credit crunch, crowdsourcing, defense in depth, Donald Davies, en.wikipedia.org, fault tolerance, Firefox, loose coupling, Marc Andreessen, market design, Monroe Doctrine, new economy, Nicholas Carr, Nick Leeson, Norbert Wiener, optical character recognition, packet switching, peer-to-peer, performance metric, pirate software, Robert Bork, Search for Extraterrestrial Intelligence, security theater, SETI@home, Silicon Valley, Skype, software as a service, statistical model, Steven Levy, The Wisdom of Crowds, Upton Sinclair, web application, web of trust, x509 certificate, zero day, Zimmermann PGP

These issues often result in suboptimal systems from the security viewpoint, and by understanding some of the environmental, psychological, and philosophical frameworks in which the coding is done, we can shine a spotlight on which areas of a system 1 are more likely to contain vulnerabilities that attackers can exploit. Where appropriate, I’ll share anecdotes to provide examples of the mindset issue at hand. My focus for the past several years has been on large-scale environments such as major corporations, government agencies and their various enclaves, and even nation states. While many of the elements are applicable to smaller environments, and even to individuals, I like to show the issues in larger terms to offer a broader social picture. Of course, painting with such a broad brush requires generalizations, and you may be able to find instances that contradict the examples. I won’t cite counterexamples, given the short space allotted to the chapter.

The key in this root certificate signs a key in another certificate. This can extend some number of times before we get to the actual certificate we’re interested in. To verify that certificate, we trace a chain of certificates. Alice’s certificate is signed by a certificate that is signed by a certificate that is signed by the certificate that Jack built. Many THE EVOLUTION OF PGP’S WEB OF TRUST 109 large corporations, governments, and so on have their own hierarchies that they create and maintain. X.509 certificates of the sort that we use for SSL connections on the Web use hierarchical trust. If you go to Amazon.com, that web server has a certificate that was signed in a hierarchy that traces up to a root certificate that we trust. For these commercial Certificate Authorities, they typically use a depth of two or three.

., published the source code of PGP in a more sophisticated set of books with specialized software tools that were optimized for easy optical character recognition (OCR) scanning of C source code. This made it easy to export unlimited quantities of cryptographic source code, rendering the export controls moot and undermining the political will to continue imposing the export controls. Today, there has been nearly an about-face in government attitude about cryptography. National and international laws, regulations, and expectations about privacy, data governance, and corporate governance either imply or require the widespread use of strong cryptography. In 1990, the cultural attitude about cryptography could be described as, Why do you need that? What do you have to hide? Twenty years later, the cultural attitude is closer to, Why don’t you have it? Don’t you understand that you have to protect your data? The definitive history of The Crypto Wars and the cultural shift in cryptography has not yet been written.


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Them And Us: Politics, Greed And Inequality - Why We Need A Fair Society by Will Hutton

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Andrei Shleifer, asset-backed security, bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Bretton Woods, capital controls, carbon footprint, Carmen Reinhart, Cass Sunstein, centre right, choice architecture, cloud computing, collective bargaining, conceptual framework, Corn Laws, corporate governance, creative destruction, credit crunch, Credit Default Swap, debt deflation, decarbonisation, Deng Xiaoping, discovery of DNA, discovery of the americas, discrete time, diversification, double helix, Edward Glaeser, financial deregulation, financial innovation, financial intermediation, first-past-the-post, floating exchange rates, Francis Fukuyama: the end of history, Frank Levy and Richard Murnane: The New Division of Labor, full employment, George Akerlof, Gini coefficient, global supply chain, Growth in a Time of Debt, Hyman Minsky, I think there is a world market for maybe five computers, income inequality, inflation targeting, interest rate swap, invisible hand, Isaac Newton, James Dyson, James Watt: steam engine, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, knowledge worker, labour market flexibility, liberal capitalism, light touch regulation, Long Term Capital Management, Louis Pasteur, low-wage service sector, mandelbrot fractal, margin call, market fundamentalism, Martin Wolf, mass immigration, means of production, Mikhail Gorbachev, millennium bug, money market fund, moral hazard, moral panic, mortgage debt, Myron Scholes, Neil Kinnock, new economy, Northern Rock, offshore financial centre, open economy, Plutocrats, plutocrats, price discrimination, private sector deleveraging, purchasing power parity, quantitative easing, race to the bottom, railway mania, random walk, rent-seeking, reserve currency, Richard Thaler, Right to Buy, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, Rory Sutherland, Satyajit Das, shareholder value, short selling, Silicon Valley, Skype, South Sea Bubble, Steve Jobs, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, the scientific method, The Wealth of Nations by Adam Smith, too big to fail, unpaid internship, value at risk, Vilfredo Pareto, Washington Consensus, wealth creators, working poor, zero-sum game, éminence grise

Fortune magazine voted it one of the ten best firms to work for in Europe, based on its commitment to equality, participatory governance, customer satisfaction and high-powered, innovatory management.35 In marked contrast, CEOs who have too much power tend to take a larger slice of the company’s profits in their own salary – and this is an accurate predictor of poor performance. One study found that the more a CEO is paid, the more he will overpay for acquisitions. Moreover, the system of corporate governance and accountability will be weaker, which will allow him to drive through higher pay deals for himself – either in terms of kindly priced share options or performance criteria that reward his good luck in running the company when wider trading conditions are good.36 Too much executive pay signals too much CEO power, and a company that is losing its way. This goes against orthodox economics, which suggests that CEO pay is determined by market forces, so if it is high, that must reflect the need to incentivise effort and reward the contribution that is being made.

Alan Greenspan admitted his ‘shocked disbelief’ that lending institutions had not set out to protect their shareholders’ equity. He was ‘very distressed’ at the ‘flaw in his thinking’, he acknowledged to a congressional committee in autumn 2008, and also accepted that the derivatives purporting to insure against risk had got out of hand and that regulation (which he had opposed) would have been preferable. The fiction is that shareholders have any genuine control over what company managements do. Corporate governance in both Britain and the United States is notoriously weak.42 In any case, Professors Lucian Bebchuk and Holger Spamann of Harvard Law School argue that even if shareholders did assert their interests and demanded long-term strategic behaviour, there is no reason to believe that the banks would avoid risky, asymmetric activities.43 Shareholders can benefit more from large gains than they can lose from large losses of a similar magnitude.

We need an understanding of markets, especially in the context of the high uncertainty of introducing a new innovation, that does not presume some unattainable, utopian vision and does not lose faith in the market process. Modern market economies are more complicated than trading nuts for berries. The state simply must enter the economic frame. And its first task should be to address the failures in finance, ownership and corporate governance. But the state also needs to reconceive itself. If there is a new iterative relationship between new consumers and new producers in a knowledge economy that is beset by imperfect information, there is also a new iterative relationship between state and citizen. The state has to open up. It has to delegate. It has to be responsive. It has to see itself as the architect of new intermediate institutions rather than the locus of action itself.


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The Alpha Masters: Unlocking the Genius of the World's Top Hedge Funds by Maneet Ahuja, Myron Scholes, Mohamed El-Erian

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activist fund / activist shareholder / activist investor, Asian financial crisis, asset allocation, asset-backed security, backtesting, Bernie Madoff, Bretton Woods, business process, call centre, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, en.wikipedia.org, family office, fixed income, high net worth, interest rate derivative, Isaac Newton, Long Term Capital Management, Marc Andreessen, Mark Zuckerberg, merger arbitrage, Myron Scholes, NetJets, oil shock, pattern recognition, Ponzi scheme, quantitative easing, quantitative trading / quantitative finance, Renaissance Technologies, risk-adjusted returns, risk/return, rolodex, short selling, Silicon Valley, South Sea Bubble, statistical model, Steve Jobs, systematic trading, zero-sum game

His assertions attract attention and his criticisms run the gamut from accusations of incompetence (“To ensure you a dazzling place in the firmament of bad management,” he writes to one recipient), to laziness (“I saw the crowd seeking autographs from the Olsen twins just below the private box that seemed to be occupied by Mr. Dreimann and others who were enjoying the match and summer sun while hobnobbing, snacking on shrimp cocktails, and sipping chilled Gewürztraminer.”), to lame corporate governance (“I must wonder how in this day and age, the company’s board of directors has not held you . . . responsible for your respective failures and shown you both the door long ago—accompanied by a well-worn boot planted in the backside.”) Many observers noted that Loeb’s “poison pen” quieted during the past four years and in its absence, the investment world’s focus shifted to how Third Point has spent 95 percent of its time since its founding investing in classic special situations globally in long/short equities, corporate credit, mortgage bonds, and tail risk trades.

Loeb also announced his plans to join the board as an advocate for the company’s beleaguered shareholders, many of whom contacted Loeb, commented on blogs, or tweeted their support for his endeavors. In taking on a $20 billion Internet legend, Loeb has seized on an extraordinary opportunity that bears the hallmarks of his successful past investments using his evolved techniques. Pursuing better corporate governance on behalf of shareholders, unlocking value with consistent catalysts, and seeing a major value proposition that others had given up on requires a unique combination of contrarian thinking, keen financial valuation skills, understanding catalyst-driven investing, and an ability to stand up and fight. The Yahoo! campaign represents the essential Dan Loeb. The Third Point Tao and Team Approach Now 50 years old, the trim, 5′10″ Loeb leads an active physical lifestyle that would put many men half his age to shame.

Political pressure to stimulate the economy during the financial crisis resulted in massive loans to local governments and real estate developers. These loans are turning increasingly insolvent as the borrowers find it hard to repay them as a consequence of the stagnant or failing demand for housing, declining prices, and the evaporation of land sales, a principal source of cash for local governments. Alternative banking networks are collapsing. Given the lack of transparency and inadequate, if nonexistent, corporate governance, it’s hard to determine the enormity of the debt and the likelihood of its repayment. This means untold risks for China’s banks, and that deep government reserves are keeping things afloat—at least for now. “The question, now, is how is China going to manage its way through it,” he says. “The excesses that we saw a year and a half ago have only built up since then.” Presently, Kynikos is short the property developers in China through the H-shares in Hong Kong as well as most of the larger Chinese banks, which the firm believes are going to need ongoing injections of capital, much of which will come from Western investors.


pages: 337 words: 89,075

Understanding Asset Allocation: An Intuitive Approach to Maximizing Your Portfolio by Victor A. Canto

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accounting loophole / creative accounting, airline deregulation, Andrei Shleifer, asset allocation, Bretton Woods, buy low sell high, capital asset pricing model, commodity trading advisor, corporate governance, discounted cash flows, diversification, diversified portfolio, fixed income, frictionless, high net worth, index fund, inflation targeting, invisible hand, John Meriwether, law of one price, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, market bubble, merger arbitrage, money market fund, new economy, passive investing, Paul Samuelson, price mechanism, purchasing power parity, risk tolerance, risk-adjusted returns, risk/return, Ronald Reagan, selection bias, shareholder value, Sharpe ratio, short selling, statistical arbitrage, survivorship bias, the market place, transaction costs, Y2K, yield curve, zero-sum game

In this way, a tax-change cycle’s length and duration depends on the disturbance’s magnitude (that is, the size of a tax-rate change) as well as the supply-and-demand elasticities associated with the disturbance. After all this is settled on, the last step of a strategy identifying tax-change cycles is to anticipate shifts in behavior (across the entire economic spectrum, from the individual laborer to the corporate CEO) caused by proposed legislative changes. The way to anticipate these behavioral shifts is rather simple: Just follow the money. Government regulation and tax policy, along with corporate governance, affect the marginal cost of various investment return-delivery vehicles, which are the ways corporations deliver returns to investors. These vehicles include dividends, capital gains, and corporate debt. Historically, each return-delivery vehicle has been taxed at a different rate, so a change in the tax code alters the after-tax return delivered by each of the three different mechanisms.

By 1982, debt had a $23 dollar advantage over dividends per $100 of precorporate-tax income (see Table 4.1: eighth column, third row). This meant corporate financing could deliver a much higher after-tax return than equity financing. A corporate manager, absent any restraint and with shareholder concerns in mind, would have maximized the after-tax return delivered to shareholders by using only corporate debt. But I argue corporate governance would not enable managers to do this. The numbers show the tax structure provided an incentive for corporations to deliver their returns in the form of debt and capital gains, which came at the expense of dividends. Table 4.1 shows the historical advantage of corporate debt over dividends and capital gains, respectively. In the 1980s, the perfect structures for taking advantage of the Reagan tax changes were leveraged buyouts (LBOs) and employee stock-ownership plans (ESOPs).

Perhaps hedging its bets, just as a well-managed company should, Microsoft did not risk the possibility of a rollback of the law and an increased tax on the one-time dividend. According to this interpretation of events, not only can increased dividends be explained by tax-rate changes, so can a decline in corporate malfeasance. A clear side benefit of the 2003 dividend tax-rate cuts is improved corporate governance. 84 UNDERSTANDING ASSET ALLOCATION Summary The different case studies in this chapter illustrate some major points in the cyclical asset-allocation story. As I mentioned earlier, the legislative process does provide advance notice of coming policy changes. This, in turn, enables analysts and investors plenty of time to identify the investment implications and behavioral changes the new legislation will generate.


pages: 309 words: 91,581

The Great Divergence: America's Growing Inequality Crisis and What We Can Do About It by Timothy Noah

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assortative mating, autonomous vehicles, blue-collar work, Bonfire of the Vanities, Branko Milanovic, call centre, collective bargaining, computer age, corporate governance, Credit Default Swap, David Ricardo: comparative advantage, Deng Xiaoping, Erik Brynjolfsson, feminist movement, Frank Levy and Richard Murnane: The New Division of Labor, Gini coefficient, Gunnar Myrdal, income inequality, industrial robot, invisible hand, job automation, Joseph Schumpeter, low skilled workers, lump of labour, manufacturing employment, moral hazard, oil shock, pattern recognition, Paul Samuelson, performance metric, positional goods, post-industrial society, postindustrial economy, Powell Memorandum, purchasing power parity, refrigerator car, rent control, Richard Feynman, Richard Feynman, Ronald Reagan, shareholder value, Silicon Valley, Simon Kuznets, Stephen Hawking, Steve Jobs, The Spirit Level, too big to fail, trickle-down economics, Tyler Cowen: Great Stagnation, union organizing, upwardly mobile, very high income, Vilfredo Pareto, War on Poverty, We are the 99%, women in the workforce, Works Progress Administration, Yom Kippur War

Khurana argues that if corporate directors paid greater attention to job candidates who possessed skills and experience relevant to their particular business, they would likely promote more new chairmen from within the company, thereby avoiding the premium paid to outsiders (and likely improving corporate performance as well).15 By 1991, the continuing run-up in top corporate salaries, which was accompanied by widespread recessionary layoffs, persuaded candidate Bill Clinton to make a political target of the tax deduction that corporations were permitted to claim on top salaries. In 1993, President Clinton pushed through Congress a bill limiting tax-deductible salaries to $1 million. But the bill exempted performance-based bonuses and stock options, on the theory that these tied chief executives’ compensation to company profitability. Corporate compensation committees responded in three ways. First, “everybody got a raise to $1 million,” Nell Minow, a corporate governance critic, told me.16 Next, corporate compensation committees, which remained bent on showering chief executives indiscriminately with cash, started inventing make-believe performance metrics. For instance, AES Corp., a firm based in Arlington, Virginia, that operates power plants, made it one of chief executive Dennis Bakke’s performance goals to ensure that AES remained a “fun” place to work.

Unsurprisingly, corporate boards resisted indexing chief executives’ stock options throughout the bull market of the 1990s, with the predictable result that the value of awarded stock options reflected mainly … the bull market of the 1990s. Another cure that proved worse than the disease was the advent of compensation consultants. Under fire from stockholders for maintaining a too-cozy relationship with CEOs, corporate compensation committees turned to outside consultants to set pay levels for top executives. But a 2007 study by the Corporate Library, a corporate-governance watchdog that Minow cofounded, revealed that companies that hired such consultants actually paid their CEOs more than companies that didn’t, and that these higher pay levels were not associated with greater returns to shareholders. Some of the consultants represented clients whose CEO base salaries averaged out to 15 to 19 percent above the “peer median.” One reason was what SEC commissioner Roel C.

Nagel, “Outside and Inside Hired CEOs: A Performance Surprise,” working paper, at http://69.175.2.130/~finman/Reno/Papers/Outside_and_Inside_Hired_CEOs-A_Financial_Surprise_FMA-Turin-blind.pdf.pdf. 16. Nell Minow, interview with author, April 14, 2011. 17. Suman Banerjee, Vladimir Gatchev, and Thomas Noe, “Doom or Gloom? CEO Stock Options After Enron,” working paper, Jan. 2008, 37, Table 1; Nell Minow interview; Franklin R. Edwards, “U.S. Corporate Governance: What Went Wrong and Can It Be Fixed?,” paper for B.I.S. and Federal Reserve Bank of Chicago conference, Oct. 30–Nov. 1 2003, 5; Brian J. Hall and Kevin Murphy, “Stock Options for Undiversified Executives,” Working Paper 8052 (Cambridge, MA: NBER, 2000), 43, Figure 3; Donald P. Delves, Stock Options and the New Rules of Corporate Accountability: Measuring, Managing, and Rewarding Executive Performance (New York: McGraw-Hill, 2004), 47–49; “Congress and the Accounting Wars,” Web page for PBS Frontline documentary, Hedrick Smith interview with Arthur Levitt, March 12, 2002, at http://www.pbs.org/wgbh/pages/frontline/shows/regulation/interviews/levitt.html. 18.


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The Economics of Enough: How to Run the Economy as if the Future Matters by Diane Coyle

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accounting loophole / creative accounting, affirmative action, bank run, banking crisis, Berlin Wall, bonus culture, Branko Milanovic, BRICs, call centre, Cass Sunstein, central bank independence, collapse of Lehman Brothers, conceptual framework, corporate governance, correlation does not imply causation, Credit Default Swap, deindustrialization, demographic transition, Diane Coyle, disintermediation, Edward Glaeser, endogenous growth, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, Financial Instability Hypothesis, Francis Fukuyama: the end of history, George Akerlof, Gini coefficient, global supply chain, Gordon Gekko, greed is good, happiness index / gross national happiness, Hyman Minsky, If something cannot go on forever, it will stop - Herbert Stein's Law, illegal immigration, income inequality, income per capita, industrial cluster, information asymmetry, intangible asset, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Jane Jacobs, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour market flexibility, light touch regulation, low skilled workers, market bubble, market design, market fundamentalism, megacity, Network effects, new economy, night-watchman state, Northern Rock, oil shock, Pareto efficiency, principal–agent problem, profit motive, purchasing power parity, railway mania, rising living standards, Ronald Reagan, selective serotonin reuptake inhibitor (SSRI), Silicon Valley, South Sea Bubble, Steven Pinker, The Design of Experiments, The Fortune at the Bottom of the Pyramid, The Market for Lemons, The Myth of the Rational Market, The Spirit Level, transaction costs, transfer pricing, tulip mania, ultimatum game, University of East Anglia, web application, web of trust, winner-take-all economy, World Values Survey, zero-sum game

So paradoxically, the cut and thrust private sector has done better than the public sector at increasing the levels of trust needed in the changed economy. The polls do suggest that people have greater trust in some private sector organizations than in the institutions of government. It is not only at the level of national economies that governance has become a hot topic though. Corporate governance has been studied extensively for the past decade or so, and in a number of countries the law has been changed to try to improve corporate governance. Companies are urged to be transparent and accountable, and to take seriously a wider set of responsibilities than making a profit. Many commentators seem to believe companies have some quasi-governmental roles. Big corporations are certainly important social institutions. At the same time, as described above, the spread of modern information and communication technologies has changed the structure of companies, making it harder for them to fill a social role in the way increasingly expected of them.

“Intangible Capital and Economic Growth.” Working Paper No. 11948. Cambridge, MA: Na: National Bureau of Economic Research. Cosmides, Leda, and John Tooby. 1994. “ Better than Rational: Evolutionary Psychology and the Invisible Hand.” The American Economic Review 84:2, pp. 327–32. Coyle, Diane. 1996. The Weightless World. Oxford: Capstone. ———. 2001. Paradoxes of Prosperity. New York: Texere. ———. 2003. “Corporate Governance, Public Governance, and Global Governance: The Common Thread.” Manchester, UK: University of Manchester, Institute of Political and Economic Governance. ———. 2007. The Soulful Science: What Economists Really Do and Why It Matters. Princeton: Princeton University Press. ———. 2009. “Scholar Goes Online to Differ with the Obama Government.” Times (London), 5 May. Coyle, Diane, and Patrick Meier. 2009.


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The Impulse Society: America in the Age of Instant Gratification by Paul Roberts

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2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, 3D printing, accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, Affordable Care Act / Obamacare, American Society of Civil Engineers: Report Card, asset allocation, business process, Cass Sunstein, centre right, choice architecture, collateralized debt obligation, collective bargaining, computerized trading, corporate governance, corporate raider, corporate social responsibility, creative destruction, crony capitalism, David Brooks, delayed gratification, double helix, factory automation, financial deregulation, financial innovation, fixed income, full employment, game design, greed is good, If something cannot go on forever, it will stop - Herbert Stein's Law, impulse control, income inequality, inflation targeting, invisible hand, job automation, John Markoff, Joseph Schumpeter, knowledge worker, late fees, Long Term Capital Management, loss aversion, low skilled workers, mass immigration, new economy, Nicholas Carr, obamacare, Occupy movement, oil shale / tar sands, performance metric, postindustrial economy, profit maximization, Report Card for America’s Infrastructure, reshoring, Richard Thaler, rising living standards, Robert Shiller, Robert Shiller, Rodney Brooks, Ronald Reagan, shareholder value, Silicon Valley, speech recognition, Steve Jobs, technoutopianism, the built environment, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, total factor productivity, Tyler Cowen: Great Stagnation, Walter Mischel, winner-take-all economy

Other proposals target the perverse incentives of executive compensation—for example, by paying senior executives with “restricted” stock that can’t be sold for five years or for several years after an executive leaves a company, thus removing the enticement to go for quick earnings boosts.9 (Under one proposal, companies would even be able to “claw back” stock compensation if, as The Wall Street Journal put it, “a business built on short-term risk-taking blows up.”10) Another particularly intriguing idea calls for linking compensation to innovation: pay depends on how much of a company’s current profits are being generated from products based on newly developed technologies.11 Executives themselves have shown little warmth for such ideas. But experts who study compensation and corporate governance say many companies would welcome the chance to bring compensation under control for very self-serving reasons. Sky-high executive compensation not only hurts employee morale and invites constant criticism from the media and politicians, but also rarely correlates with corporate performance.12 To the contrary, one study found that two out of five of the highest-paid American CEOs had been at companies that were either bailed out or busted for fraud, or had themselves been terminated.

New York Times, July 7, 2013. http://www.nytimes.com/2013/07/08/opinion/krugman-defining-prosperity-down.html?src=recg. Kuchler, Hannah. “Data Pioneers Watching Us Work.” Financial Times, February 17, 2014. Lazonick, William. “The Innovative Enterprise and the Developmental State: Toward an Economics of ‘Organizational Success.’ ” Discussion paper presented at Finance, Innovation & Growth 2011. Lazonick, William, and Mary O’Sullivan. “Maximizing Shareholder Value: A New Ideology for Corporate Governance,” Economy and Society 29, no. 1 (Feb. 2000): 19. Loewenstein, George, “Insufficient Emotion: Soul-Searching by a Former Indicter of Strong Emotions.” Emotion Review 2, no. 3 (July 2010): 234–39. http://www.cmu.edu/dietrich/sds/docs/loewenstein/InsufficientEmotion. pdf. Lynd, Robert S. “The People as Consumers.” In Recent Social Trends in the United States: Report on the President’s Research Committee on Social Trends, with a Foreword by Herbert Hoover, 857–911.

“GM Speeds Time to Market through Blistering Fast Processors,” FreeLibrary, http://www.thefreelibrary.com/GM+speeds+time+to+market+through+blistering+fast+processors%3a+General..-a0122319616. 6. “S&P 500: Total and Inflation-Adjusted Historical Returns,” Simple Stock Investing, http://www.simplestockinvesting.com/SP500-historical-real-total-returns.htm. 7. William Lazonick and Mary O’Sullivan, “Maximizing Shareholder Value: A New Ideology for Corporate Governance,” Economy and Society 29, no. 1 (Feb. 2000): 19. 8. Ibid. 9. Ted Nordhaus and Michael Shellenberger, Break Through: From the Death of Environmentalism to the Politics of Possibility, p. 156. 10. “Work Stoppages Falling,” graph, U.S. Bureau of Labor Statistics, http://old.post-gazette.com/pg/images/201302/20130212work_stoppage600.png. 11. Loukas Karabarbounis and Brent Neiman, “Declining Labor Shares and the Global Rise of Corporate Savings,” research paper, October 2012, http://econ.sciences-po.fr/sites/default/files/file/cbenard/brent_neiman_LabShare.pdf. 12.


pages: 346 words: 102,666

Infomocracy: A Novel by Malka Older

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corporate governance, game design, land tenure, young professional

Ken quickly learns, and completely fails to absorb, a great deal about the politicking involved in the airport’s initial construction and the decision on its location, as well as which airlines serve it and since when and to which connections, and its place in various ranking schemes (official associations, user-generated, statistically based), while bypassing reams on the sourcing of materials, the architecture firm, and the history of the land below it. Along the way, ads—flat and projected, still and animated—crowd his vision, all of them translated and most of them annotated by his Information: he learns that the company trying to sell him whiskey is a subsidiary of Coca-Cola (not surprising, since they are part of the corporate government that owns this airport) and sees the annual statement summary for a firm offering wealth management. Not having any wealth to speak of, he ignores both the ad and the background Information discrediting it. As he walks past the large windows looking out on the runways, Information projects a split-screen view with old-school vids of exactly the same scene taken during the flooding of the 2011 tsunami.

“They might have changed leadership,” Tabby says. They both know she is not talking about Johnny Fabré, the glossy good-looker who has been the public face of Liberty for over a decade. “Changed direction.” “Four weeks before the election?” Mishima asks. “Or…” Tabby says. “Or they could have been planning this all along.” “Laying the groundwork.” “Establishing their credibility as a major, legitimate corporate government, committed to micro-democracy, while making sure that the people they want to reach would hear the dog whistle.” “Making sure those people want war.” Every hypothesis seems scarier than the last. “Do they have a chance at the Supermajority?” Tabby asks finally. Mishima shrugs. “A chance? Yes. They are the fifth-largest government now, and you know the margins are tight at the top. How much of a chance?”

It’s stronger rhetoric than usual. Policy1st’s spokespeople are not supposed to vilify anyone, not even the rich, and Ken thrills to the knowledge that it’s go-for-broke time. He twitches the volume up on his earpiece; although most of the clients in the bar are focused on the debate, a small but noisy contingent is belting karaoke in the back. “Our esteemed colleague”—it is the spokesperson for 888, a China-based corporate government, who speaks after Suzuki—“worries much about the risks he does not know but says nothing about the risks that have already been confirmed. Excessive plane travel is choking our planet and strangling our economies. Mantle tunnels will use a combination of gravitational forces and sophisticated engineering for clean and sustainable long-haul travel. 888 is committed to continuing our efforts to fully leverage this great advance in technology.”

The Data Revolution: Big Data, Open Data, Data Infrastructures and Their Consequences by Rob Kitchin

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Bayesian statistics, business intelligence, business process, cellular automata, Celtic Tiger, cloud computing, collateralized debt obligation, conceptual framework, congestion charging, corporate governance, correlation does not imply causation, crowdsourcing, discrete time, George Gilder, Google Earth, Infrastructure as a Service, Internet Archive, Internet of things, invisible hand, knowledge economy, late capitalism, lifelogging, linked data, Masdar, means of production, Nate Silver, natural language processing, openstreetmap, pattern recognition, platform as a service, recommendation engine, RFID, semantic web, sentiment analysis, slashdot, smart cities, Smart Cities: Big Data, Civic Hackers, and the Quest for a New Utopia, smart grid, smart meter, software as a service, statistical model, supply-chain management, the scientific method, The Signal and the Noise by Nate Silver, transaction costs

Directed data Organised and structured surveillance, wherein one group of people (e.g., law enforcement officials, teachers, doctors, welfare officials, bureaucrats, bosses) observe others (e.g., citizens, pupils, patients, workers) in person or through a technological lens (e.g., surveys such as a census, government forms, tax receipts, inspections, CCTV cameras), has long been a feature of societies, an essential component of state and corporate governance (Lyon 2007). Such a form of governmentality (the interlocking rationale, apparatus, institutions, roles and procedures of governance) enables centralised control and regulation across a broad spectrum of domains and helps to maintain order, produce good government, effective administration, profitable business, and sustainable and stable communities, both through the active disciplining of subjects but also their self-disciplining (that is, people modify their behaviour to conform to expectations and rules).

If big data provide all of these benefits, the regime contends that it makes little sense not to pursue the development of big data systems. Of course, the argument being presented is narrow and selective and deliberately avoids highlighting potential negative consequences with respect to civil liberties, dataveillance, social sorting, data security, control creep, anticipatory governance, technocratic and corporate governance, and technological lock-ins (see Chapter 10). It is the view of vested interests, particularly those seeking to sell big data technologies, and of governments pursuing a neoliberal vision of governance and regulation, not the view of citizens or communities who might still be advocates of big data and ubiquitous computing, but envisage them being used in emancipatory, empowering and participatory ways with the more negative effects being subject to regulation and oversight.

What was private or unknown is increasingly being revealed to a diverse set of interests, and decision-making within government and business is becoming more data-driven, evidence-informed and technocratic. This chapter examines a selection of the ethical, social, political and legal concerns that the data revolution raises, including dataveillance and data footprints and shadows, privacy, data security, profiling, social sorting and redlining, control creep, anticipatory governance, technocratic and corporate governance and technological lock-ins, and ownership and intellectual property. How each of these issues is thought about is contested, with views varying within and between science, companies, government and civil society, who have differing agendas, vested interests, and political sensibilities. Thus, there are no easy answers to resolving the issues discussed, and resolutions always consist of compromises.

Who Rules the World? by Noam Chomsky

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Albert Einstein, anti-communist, Ayatollah Khomeini, Berlin Wall, Bretton Woods, British Empire, capital controls, corporate governance, corporate personhood, cuban missile crisis, deindustrialization, Donald Trump, Doomsday Clock, Edward Snowden, en.wikipedia.org, facts on the ground, failed state, Fall of the Berlin Wall, Howard Zinn, illegal immigration, Intergovernmental Panel on Climate Change (IPCC), invisible hand, liberation theology, Malacca Straits, Martin Wolf, Mikhail Gorbachev, Monroe Doctrine, nuclear winter, Occupy movement, oil shale / tar sands, one-state solution, Plutonomy: Buying Luxury, Explaining Global Imbalances, precariat, Ralph Waldo Emerson, Ronald Reagan, South China Sea, Stanislav Petrov, structural adjustment programs, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, trade route, union organizing, uranium enrichment, wage slave, WikiLeaks, working-age population

There was also a sharp change in the U.S. economy in the 1970s, toward financialization and export of production. A variety of factors converged to create a vicious cycle of radical concentration of wealth, primarily in the top fraction of one percent of the population—mostly CEOs, hedge-fund managers, and the like. That leads to the concentration of political power, hence state policies to increase economic concentration: fiscal policies, rules of corporate governance, deregulation, and much more. Meanwhile the costs of electoral campaigns skyrocketed, driving the parties into the pockets of concentrated capital, increasingly financial: the Republicans reflexively, the Democrats—by now what used to be moderate Republicans—not far behind. Elections have become a charade, run by the public relations industry. After his 2008 victory, Obama won an award from the industry for the best marketing campaign of the year.

Two major elements of this shift were financialization and the offshoring of production, both related to the decline in the rate of profit in manufacturing and the dismantling of the postwar Bretton Woods system of capital controls and regulated currencies. The ideological triumph of “free market doctrines,” highly selective as always, administered further blows as these doctrines were translated into deregulation, rules of corporate governance linking huge CEO rewards to short-term profits, and other such policy decisions. The resulting concentration of wealth yielded greater political power, accelerating a vicious cycle that has led to extraordinary wealth for a tiny minority while for the large majority real incomes have virtually stagnated. At the same time, the cost of elections skyrocketed, driving both parties ever deeper into corporate pockets.

Around the 1970s, it entered a new phase: conscious self-inflicted decline, as planners both private and state shifted the U.S. economy toward financialization and the offshoring of production, driven in part by the declining rate of profit in domestic manufacturing. These decisions initiated a vicious cycle in which wealth became highly concentrated (dramatically so in the top 0.1 percent of the population), yielding a concentration of political power, and hence legislation to carry the cycle further: revised taxation and other fiscal policies, deregulation, changes in the rules of corporate governance allowing huge gains for executives, and so on. Meanwhile, for the majority, real wages largely stagnated, and people were able to get by only by sharply increased workloads (far beyond those of Europe), unsustainable debt, and, since the Reagan years, repeated bubbles, creating paper wealth that inevitably disappeared when they burst, after which their perpetrators were often bailed out by the taxpayer.


pages: 831 words: 98,409

SUPERHUBS: How the Financial Elite and Their Networks Rule Our World by Sandra Navidi

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activist fund / activist shareholder / activist investor, assortative mating, bank run, barriers to entry, Bernie Sanders, Black Swan, Bretton Woods, butterfly effect, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, cognitive bias, collapse of Lehman Brothers, collateralized debt obligation, commoditize, conceptual framework, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, diversification, East Village, Elon Musk, eurozone crisis, family office, financial repression, Gini coefficient, glass ceiling, Goldman Sachs: Vampire Squid, Google bus, Gordon Gekko, haute cuisine, high net worth, hindsight bias, income inequality, index fund, intangible asset, Jaron Lanier, John Meriwether, Kenneth Arrow, Kenneth Rogoff, knowledge economy, London Whale, Long Term Capital Management, Mark Zuckerberg, mass immigration, McMansion, mittelstand, money market fund, Myron Scholes, NetJets, Network effects, offshore financial centre, old-boy network, Parag Khanna, Paul Samuelson, peer-to-peer, performance metric, Peter Thiel, Plutocrats, plutocrats, Ponzi scheme, quantitative easing, Renaissance Technologies, rent-seeking, reserve currency, risk tolerance, Robert Gordon, Robert Shiller, Robert Shiller, rolodex, Satyajit Das, shareholder value, Silicon Valley, sovereign wealth fund, Stephen Hawking, Steve Jobs, The Future of Employment, The Predators' Ball, too big to fail, women in the workforce, young professional

Dawn Kopecki, “Young Bankers Fed Up With 90-Hour Weeks Move to Startups,” Bloomberg, May 9, 2014 http://www.bloomberg.com/news/articles/2014-05-09/young-bankers-fed-up-with-90-hour-weeks-move-to-startups. 4. David F. Larcker, Allan L. McCall, and Brian Tayan, “Separation Anxiety: The Impact of CEO Divorce on Shareholders,” Rock Center for Corporate Governance at Stanford University Closer Look Series: Topics, Issues and Controversies in Corporate Governance and Leadership No. CGRP-36, September 28, 2013, http://corpgov.law.harvard.edu/2013/12/03/the-impact-of-ceo-divorce-on-shareholders. 5. Lorenz Wagner, “Endlich gut genug,” Süddeutsche Zeitung, Heft 37, 2014 http://sz-magazin.sueddeutsche.de/texte/anzeigen/42184/2/1 6. Stefan Niggemeier, “When Tabloids Turn: Powerful Media Ally Abandons German President,” Spiegel, January 3, 2012, http://www.spiegel.de/international/germany/when-tabloids-turn-powerful-media-ally-abandons-german-president-a-806982.xhtml. 7.

Thus, these power-cluster events create the connective tissue of socially cohesive circles of influence. Only superhubs have the “operating manual” on how to gain access and navigate these mechanisms. THE ANNUAL POWER CIRCUIT: DISPATCH FROM DAVOS The World Economic Forum (WEF) in Davos is one of the most famous and effective of these platforms. Kicking off the meeting season in January, it unites the leaders of the financial industry along with those of corporations, governments, and academia. As the participants all belong to various multidimensional interdisciplinary networks—of people, businesses, institutions, and information—the cross-fertilization and disruption of “silo-thinking” is particularly effective. The magic formula of Davos’s success is that the village is small, inconvenient to travel to, and hard to navigate. These drawbacks are actually the event’s greatest asset as participants are literally forced to network.


pages: 207 words: 52,716

Capitalism 3.0: A Guide to Reclaiming the Commons by Peter Barnes

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Albert Einstein, car-free, clean water, collective bargaining, corporate governance, corporate personhood, corporate raider, corporate social responsibility, dark matter, diversified portfolio, en.wikipedia.org, hypertext link, Isaac Newton, James Watt: steam engine, jitney, money market fund, new economy, patent troll, profit maximization, Ronald Coase, telemarketer, The Wealth of Nations by Adam Smith, transaction costs, War on Poverty, Yogi Berra

Among them are: • A series of ecosystem trusts that protect air, water, forests and habitat; • A mutual fund that pays dividends to all Americans—one person, one share; • A trust fund that provides start-up capital to every child; • A risk-sharing pool for health care that covers everyone; • A national fund based on copyright fees that supports local arts; • A limit on the amount of advertising. The final part of the book explains how we can get to Capitalism 3.0 from here, how the models can work, and what you and I can do to help. The dramatis personae throughout the book are corporations, government, and the commons. The plot goes something like this. As the curtain rises, corporations are gobbling up the commons. They’re the big boys on the block, and the commons—an unorganized mélange of nature, community, and culture—is the constant loser. It has no property rights of its own, so must rely on government for protection. But government is a fickle guardian that tilts heavily toward corporations.

In this vision, American workers, through their retirement funds, would require publicly traded corporations to place workers, communities, and nature on a par with short-term profit. In reality, pension funds have come to play a larger role in capital markets, but ironically, it’s usually as the swing votes when raiders seek to take over underperforming corporations. In these situations, the pension funds often vote with raiders to enhance stockholder value. Recently, pension funds have also pushed for improvements in corporate governance. But pension fund trustees are hardly sans culottes in pinstripes. They’re tightly bound by their fiduciary responsibility to retirees, and must seek the highest rates of return or face reprisal from the U.S. Labor Department, which oversees them. It would be a luscious irony if capital markets could become a check on runaway capitalism. But capital markets suffer from the same disease as corporations themselves—an incurable devotion to maximizing profit.


pages: 166 words: 49,639

Start It Up: Why Running Your Own Business Is Easier Than You Think by Luke Johnson

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Albert Einstein, barriers to entry, Bernie Madoff, collapse of Lehman Brothers, corporate governance, corporate social responsibility, creative destruction, credit crunch, Grace Hopper, happiness index / gross national happiness, high net worth, James Dyson, Jarndyce and Jarndyce, Jarndyce and Jarndyce, mass immigration, mittelstand, Network effects, North Sea oil, Northern Rock, patent troll, Plutocrats, plutocrats, Ponzi scheme, profit motive, Ralph Waldo Emerson, Silicon Valley, software patent, stealth mode startup, Steve Jobs, Steve Wozniak, The Wealth of Nations by Adam Smith, traveling salesman, tulip mania, Vilfredo Pareto, wealth creators

So functionaries take centre stage, too afraid to push through difficult policies, forever trying to accommodate everyone. That is not how great businesses are built. Great businesses are built by confident men and women who understand Goethe’s maxim: ‘Whatever you can do, or dream you can, begin it. Boldness has genius, power and magic in it. Begin it now.’ Instead, companies are too often controlled not by titans of the boardroom, but by shadowy hedge-fund managers, faceless critics and corporate governance experts who have never run so much as a whelk stall. ‘Great spirits have always found violent opposition from mediocrities’ Albert Einstein Management gurus reckon one of the attributes of an outstanding leader is a high ‘emotional quotient’ – empathy for people. The principle makes sense, although the term sounds a bit awkward. Certainly, charm is helpful. But the most vital talent in leaders I’ve known is an ability to take decisions.

He dealt with things with absolute expediency by telephone, and did not feel the desire to gather lots of men in suits in a posh room to discuss agendas, targets and mission statements, and then circulate minutes (another ritual of mind-boggling tedium) of the time wasted. I would guess that only 20 per cent of most board meetings are worthwhile – I’m sure if they were restricted to half an hour we would all enjoy life more. Many rituals of business are being massively legitimized by the corporate governance movement, which is moving to ever more bizarre extremes – such as the idea once espoused by the Institute of Directors that its members should sit examinations and gain qualifications to prove their fitness to manage. Business is about successfully dealing with the marketplace, not attending a series of academic lectures. But quangos and bureaucrats live and breathe pointless rituals of all kinds, so one should not be surprised.

Working the Street: What You Need to Know About Life on Wall Street by Erik Banks

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accounting loophole / creative accounting, borderless world, corporate governance, estate planning, fixed income, greed is good, old-boy network, risk/return, rolodex, telemarketer

Working The Street ALSO BY ERIK BANKS The Financial Lexicon, Palgrave Macmillan, 2004. Liquidity Risk. Palgrave Macmillan, 2004. The Failure of Wall Street. Palgrave Macmillan, 2004. The Credit Risk of Complex Derivatives, 3rd edition. Palgrave Macmillan, 2003. Corporate Governance. Palgrave Macmillan, 2003. Alternative Risk Transfer. John Wiley, 2004. Exchange-Traded Derivatives. John Wiley, 2003. The Simple Rules of Risk. John Wiley, 2002. e-Finance. John Wiley, 2000. The Rise and Fall of the Merchant Banks. Kogan Page, 1999. The Credit Risk of Complex Derivatives, 2nd edition. Macmillan, 1997. Asia Pacific Derivative Markets. Macmillan, 1996. Emerging Asian Fixed Income Markets. Macmillan, 1995. The Credit Risk of Complex Derivatives. Macmillan, 1994. The Credit Risk of Financial Instruments.

Imagine that two otherwise identical and qualified candidates deliver their resumes: one indicates that she’s taken Principles of Corporate Finance and Advanced Cost Accounting, has done a semester abroad at the Sorbonne to improve her conversational French, and is president of the local chapter of the accounting club; the other indicates that she just completed a research paper showing Keynes had it all wrong, that her particular hobby is determining how Trollope’s mid-nineteenth century novels can give us all lessons on improving corporate governance, that she trains rescue dogs in her free time, and that she has run the Sahara ultramarathon. Who’s going to get the first (and maybe only) call to come in for a chat? Think about it, and try to make a difference when presenting yourself. LEAVE YOUR ATTITUDE AT HOME Once you’ve managed to interest someone in your background—by tapping your contacts and showing them something creative—you’ll be set for 2 0 | W o r k i n g t h e St r e e t your interviews.


pages: 164 words: 57,068

The Second Curve: Thoughts on Reinventing Society by Charles Handy

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Airbnb, basic income, Bernie Madoff, bitcoin, bonus culture, British Empire, call centre, Clayton Christensen, corporate governance, delayed gratification, Diane Coyle, Edward Snowden, falling living standards, future of work, G4S, greed is good, informal economy, Internet of things, invisible hand, joint-stock company, joint-stock limited liability company, Kickstarter, Kodak vs Instagram, late capitalism, mass immigration, megacity, mittelstand, Occupy movement, payday loans, peer-to-peer lending, Plutocrats, plutocrats, Ponzi scheme, Ronald Coase, shareholder value, sharing economy, Skype, Steve Jobs, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, transaction costs, Veblen good, Walter Mischel

To do less would indicate that they judged the performance unsatisfactory, which they would only do in extreme circumstances. The result is, inevitably, a constantly rising average, unrelated to any world beyond the one they know. It is the perfect self-validating system, impervious to outside influence. Should outsiders be included? You might think so but that would require a change to the rules of corporate governance which, of course, are set by the board itself. We do not grudge successful sports stars or entrepreneurs their earnings, which we attribute to their special skills. The irony is that neither the sports hero nor the entrepreneur does it for the money. They do it because they love it and are good at it. The money is nice but not the point. It is when money becomes the point that something goes wrong.

Make the taxation too high and those high earners will leave or find ways around it. Nor will competition solve the problem; it might even make it worse in a winner-takes-all world, making the successful even richer. We need, instead, to start at the beginning, where the wealth is created, to look to the institutions, to the way they are designed and governed, to citizen companies and profit-sharing rather than arbitrary bonuses, to better corporate governance, to improved education and, perhaps, to trade unions reinvented as professional organisations, the last especially. We miss the countervailing power of the trade unions, who have stuck to their old power bases in the large organisations, now mainly confined to the public sector, and seem to ignore the opportunities open to them as the champions of the self-employed and the proprietors of small businesses, the new and growing workforce.


pages: 373 words: 80,248

Empire of Illusion: The End of Literacy and the Triumph of Spectacle by Chris Hedges

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Albert Einstein, Ayatollah Khomeini, Cal Newport, clean water, collective bargaining, corporate governance, creative destruction, Credit Default Swap, haute couture, Honoré de Balzac, Howard Zinn, illegal immigration, income inequality, Joseph Schumpeter, Naomi Klein, offshore financial centre, Ralph Nader, Ronald Reagan, single-payer health, statistical model, uranium enrichment

They are loyal to the corporate state. They cling to the corporation and the corporate structure. It is known. It is safe. It is paternal. It is the system. Our government is being wrecked by corporations, which now get 40 percent of federal discretionary spending. More than 800,000 jobs once handled by government employees have been outsourced to corporations, a move that has not only further empowered our shadow corporate government but also helped destroy federal workforce unions. Management of federal prisons, the management of regulatory and scientific reviews, the processing or denial of Freedom of Information requests, interrogating prisoners, and running the world’s largest mercenary army in Iraq—all this has become corporate. And these corporations, in a perverse arrangement, make their money directly off of the American citizen.

It has made sure only thirty-six of its 143 subsidiaries are incorporated in the United States and 107 subsidiaries (or 75 percent) are incorporated in thirty different countries. This arrangement allows Halliburton to lower its tax liability on foreign income by establishing a “controlled foreign corporation” and subsidiaries inside low-tax, or no-tax, countries used as tax havens. Thus the corporations take our money. They squander it. They cleverly evade taxation. And our corporate government not only funds them but protects them. The financial and political disparities between our oligarchy and the working class have created a new global serfdom. Credit Suisse analysts estimate that the number of subprime foreclosures in the United States by the end of 2012 will total 1,390,000. If that estimate is correct, 12.7 percent of all residential borrowers in the United States will be forced out of their homes.


pages: 233 words: 73,772

The Secret World of Oil by Ken Silverstein

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business intelligence, clean water, corporate governance, corporate raider, Donald Trump, energy security, Exxon Valdez, failed state, Google Earth, offshore financial centre, oil shock, paper trading, rolodex, Ronald Reagan, WikiLeaks, Yom Kippur War

He described Glencore as an “active predatory force” that has an inordinate influence on the price of raw materials that are important to the US and global economy. “They are smart and good and know how to use information to exploit other investors,” he told me. “When they’re selling you don’t want to be buying, and when they’re buying you don’t want to be selling.” Still, the real secret to Glencore’s success is operating in markets that scare off more risk-averse companies that fear running afoul of corporate governance laws in the United States and the European Union. In fact, those markets are precisely where the future of the company lies. Deutsche Bank identified Glencore’s “key drivers” as: the growth of copper in the Democratic Republic of the Congo; coal in Colombia; oil and natural gas in Equatorial Guinea; and gold in Kazakhstan. All are places with a heady, dangerous mix of extraordinary natural wealth and various degrees of instability, violence, and strongman leaders.

In her book Sale of the Century, Chrystia Freeland described his Moscow offices as decorated in gold, crystal, and floral designs that “an eight-year-old girl with a princess fantasy and a gold credit card might concoct” and the casino’s decor as “oil paintings of naked women wrapped in furs,” with private bedrooms that had mirrored ceilings and Jacuzzis. “Sometimes we have special guests, and they like to be entertained,” Gutseriev explained to her. Later Gutseriev went into the energy business—he was understatedly described in a US diplomatic cable released by WikiLeaks as “not known for his transparent corporate governance.” He did well. He regularly appears on Forbes’s list of the richest Russians, with a fortune estimated in 2012 at around $6.7 billion. A decade earlier, though, Gutseriev was down and seemingly out. In 2002, the Kremlin fired him as the head of state-owned oil firm Slavneft for resisting the company’s privatization, according to the WikiLeaked cable. That same year, however, he sought to regain his position by arranging for three busloads of armed guards to take over its Moscow offices.


pages: 249 words: 73,731

Car Guys vs. Bean Counters: The Battle for the Soul of American Business by Bob Lutz

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corporate governance, creative destruction, currency manipulation / currency intervention, flex fuel, medical malpractice, Ponzi scheme, profit maximization, Ralph Nader, shareholder value, Steve Jobs, Toyota Production System, transfer pricing, Unsafe at Any Speed, upwardly mobile

What if it loses $300 million per year? Isn’t that worth it in terms of good publicity? Compared to the billions we pay globally for conventional advertising, it’s a drop in the bucket, and it’s way more effective.” End of discussion. The founder and principal shareholder has been heard from, and everyone turns to act. There is decidedly something to be said for the swifter, more authoritarian corporate governance resulting from someone’s name being on the building! And so, we watched as Toyota launched the Prius in the United States to huge acclaim from the nation’s media.The future of the automobile is here, thanks to the brilliant engineers at Toyota! While America’s “dinosaur Big Three” continued to foist oversized SUVs and pickups on the hapless American public (and, at $1.50/gallon at the time, roughly one-quarter of what the rest of the industrial world was paying for motor fuel, that “hapless” public was buying every big V8 truck we could produce, while small, fuel-efficient vehicles were left to decompose slowly on dealer lots), the wise, omniscient Toyota company, ever attuned to the needs of society rather than financial gain, was creating the vehicles that would save us from both the oppression of foreign oil and the inevitable CO2-caused planetary meltdown.

That reversal was hastened by the next shock to a now partially numb GM: on March 30, 2009, Rick Wagoner was pressured to resign by the Automotive Task Force, the U.S. Treasury, and, I suspect, the new president himself. The old GM board, still legally bound to defend the shareholders as well as to select or fire key executives, was miffed over the way this was handled, considerably at odds with the law and rules of corporate governance. It was “explained” to the board that, post–the increasingly firmly planned Chapter 11, the government would be the largest shareholder and that understanding and support for Wagoner’s “resignation” would be in the best interest of all. The reaction in the company over Wagoner’s departure was one of sadness and regret. Rick was a kind, intelligent CEO of spectacular human qualities. The welfare of the GM family was close to his heart.


pages: 318 words: 77,223

The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse by Mohamed A. El-Erian

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activist fund / activist shareholder / activist investor, Airbnb, balance sheet recession, bank run, barriers to entry, break the buck, Bretton Woods, British Empire, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, collapse of Lehman Brothers, corporate governance, currency peg, Erik Brynjolfsson, eurozone crisis, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, fixed income, Flash crash, forward guidance, friendly fire, full employment, future of work, Hyman Minsky, If something cannot go on forever, it will stop - Herbert Stein's Law, income inequality, inflation targeting, Jeff Bezos, Kenneth Rogoff, Khan Academy, liquidity trap, Martin Wolf, megacity, Mexican peso crisis / tequila crisis, moral hazard, mortgage debt, Norman Mailer, oil shale / tar sands, price stability, principal–agent problem, quantitative easing, risk tolerance, risk-adjusted returns, risk/return, Second Machine Age, secular stagnation, sharing economy, sovereign wealth fund, The Great Moderation, The Wisdom of Crowds, too big to fail, University of East Anglia, yield curve, zero-sum game

Its path of “extending and pretending” is coming to an end, forcing society—both there and in European partner countries—to confront two very different outcomes. How about the global economy as a whole? We will get more information as we get closer to the neck of the T junction, and, fortunately, there is nothing preordained about which road it takes from the current path it is on. What corporations, governments, and households do can have an important influence on what currently are finely balanced probabilities. Simply put, the major catalyst for taking the good road out of the T is a combination of better politics and turbochargers. More constructive politics would enable the implementation of an engineering solution that already benefits from quite a bit of professional-consensus backing.

Instead it is a recognition of the fluidity of Chairman Bernanke’s “unusually uncertain outlook.” Moreover, this state of affairs should not translate into operational paralysis and a narrowing of vision. Quite the contrary. It calls for energized thinking. In the process, it forces us to pay heed to insights from behavioral science and neuroscience, and it makes it essential that we work to enhance at every level—corporate, government, household, and multilateral—the right mix of optionality, resilience, and agility as we go forward. The implications of all this go well beyond traditional entities having to adjust. Even the more agile disruptors will be pressed to maintain their lead, and, as Amazon and Google have recently demonstrated, they will need to be willing to occasionally “self-disrupt” from a position of strength.


pages: 103 words: 24,033

The Immigrant Exodus: Why America Is Losing the Global Race to Capture Entrepreneurial Talent by Vivek Wadhwa

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3D printing, card file, corporate governance, crowdsourcing, Elon Musk, immigration reform, labour mobility, Marc Andreessen, open economy, pattern recognition, Ray Kurzweil, Sand Hill Road, Silicon Valley, Silicon Valley startup, software as a service, the new new thing, Y2K

In alienating and locking out skilled immigrant entrepreneurs and inventors, we have not only blocked the flow of the very lifeblood that built the economic backbone of this great country, we have also deadened the nerve endings that create the next great thing. If we restore this flow, we restore our nation. About the Author Vivek Wadhwa is director of research at the Center for Entrepreneurship and Research Commercialization and executive in residence at the Pratt School of Engineering, Duke University; vice president of innovation and strategy at Singularity University; fellow at the Arthur & Toni Rembe Rock Center for Corporate Governance, Stanford University; and distinguished visiting scholar, Halle Institute of Global Learning, Emory University. He has also been a senior research associate at the Labor and Worklife Program of Harvard Law School and a visiting scholar at the School of Information at the University of California, Berkeley. In his roles at Duke, Stanford, and Emory Universities, Wadhwa lectures on subjects such as entrepreneurship and public policy, helps prepare students for the real world, and leads groundbreaking research projects.


pages: 72 words: 21,361

Race Against the Machine: How the Digital Revolution Is Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment and the Economy by Erik Brynjolfsson

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Amazon Mechanical Turk, Any sufficiently advanced technology is indistinguishable from magic, autonomous vehicles, business process, call centre, combinatorial explosion, corporate governance, creative destruction, crowdsourcing, David Ricardo: comparative advantage, easy for humans, difficult for computers, Erik Brynjolfsson, factory automation, first square of the chessboard, first square of the chessboard / second half of the chessboard, Frank Levy and Richard Murnane: The New Division of Labor, hiring and firing, income inequality, intangible asset, job automation, John Markoff, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Khan Academy, Kickstarter, knowledge worker, labour mobility, Loebner Prize, low skilled workers, minimum wage unemployment, patent troll, pattern recognition, Paul Samuelson, Ray Kurzweil, rising living standards, Robert Gordon, self-driving car, shareholder value, Skype, too big to fail, Turing test, Tyler Cowen: Great Stagnation, Watson beat the top human players on Jeopardy!, wealth creators, winner-take-all economy, zero-sum game

Aided by digital technologies, entrepreneurs, CEOs, entertainment stars, and financial executives have been able to leverage their talents across global markets and capture reward that would have been unimaginable in earlier times. To be sure, technology is not the only factor that affects incomes. Political factors, globalization, changes in asset prices, and, in the case of CEOs and financial executives, corporate governance also plays a role. In particular, the financial services sector has grown dramatically as a share of GDP and even more as a share of profits and compensation, especially at the top of the income distribution. While efficient finance is essential to a modern economy, it appears that a significant share of returns to large human and technological investments in the past decade, such as those in sophisticated computerized program trading, were from rent redistribution rather than genuine wealth creation.


pages: 526 words: 158,913

Crash of the Titans: Greed, Hubris, the Fall of Merrill Lynch, and the Near-Collapse of Bank of America by Greg Farrell

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Airbus A320, Apple's 1984 Super Bowl advert, bank run, banking crisis, bonus culture, call centre, Captain Sullenberger Hudson, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, financial innovation, fixed income, glass ceiling, high net worth, Long Term Capital Management, mass affluent, Mexican peso crisis / tequila crisis, Plutocrats, plutocrats, Ronald Reagan, six sigma, sovereign wealth fund, technology bubble, too big to fail, US Airways Flight 1549, yield curve

“Stan’s the CEO,” said Finnegan. “If he’s saying that he thinks this is the best course of action, maybe we should listen.” It was too late. There was already too much antagonism in the room for the other directors to be swayed. Later that evening, the outside directors voted to retain their own legal counsel, Robert Joffe of Cravath, Swaine & Moore. To anyone familiar with the world of corporate governance, a board’s decision to retain its own attorney, separate from the company’s general counsel, is a sign of trouble. It would be akin to a wife, following a disagreement with her husband, hiring a lawyer to represent her interests. Even if the word “divorce” is never uttered, the act of hiring an independent lawyer represents an irreparable breach of trust in the relationship. THE NEXT DAY, the board reconvened at Merrill Lynch headquarters downtown.

Or it could have been Bob McCann, the ambitious head of Merrill’s private client business, who had run afoul of O’Neal in the past. That evening O’Neal called Armando Codina, who made it clear that the revelation of the talks with Wachovia had undermined O’Neal’s position. Later, O’Neal doubled back to Fleming, calling him at home to tell his deputy that it was over for him as CEO. THE NEXT DAY, CODINA, who headed up the corporate governance committee at Merrill, held a conference call with his fellow directors to discuss O’Neal’s future at the firm. Ever since the previous Monday, when O’Neal had challenged the directors—telling them that if they didn’t support his initiative to sell to Wachovia, he wasn’t sure if he wanted to remain CEO of Merrill Lynch—Codina and Cribiore had lost confidence in him. When the New York Times story about the Wachovia initiative appeared on Friday, several other directors began to harbor similar feelings.

Bank of America’s dependence on the federal government in 2009 led to another change at the bank, one which has altered its character permanently: BofA’s board of directors is no longer closely tethered to the business communities of North and South Carolina. This shift in governance, prompted by regulators, was a sign of how much Bank of America had outgrown its roots as the old North Carolina National Bank. The expansion of BofA’s board is a positive step from a corporate governance point of view, since it increases the board’s independence from the bank’s top management. But the change in the bank’s character marks a peculiar kind of loss. In an era of huge, multinational corporate behemoths that employ hundreds of thousands of people, the idea that Bank of America—one of those behemoths—could still be run by the leading citizens of Charlotte and environs carried a sentimental appeal.


pages: 402 words: 110,972

Nerds on Wall Street: Math, Machines and Wired Markets by David J. Leinweber

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AI winter, algorithmic trading, asset allocation, banking crisis, barriers to entry, Big bang: deregulation of the City of London, butterfly effect, buttonwood tree, buy low sell high, capital asset pricing model, citizen journalism, collateralized debt obligation, corporate governance, Craig Reynolds: boids flock, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Danny Hillis, demand response, disintermediation, distributed generation, diversification, diversified portfolio, Emanuel Derman, en.wikipedia.org, experimental economics, financial innovation, fixed income, Gordon Gekko, implied volatility, index arbitrage, index fund, information retrieval, intangible asset, Internet Archive, John Nash: game theory, Kenneth Arrow, Khan Academy, load shedding, Long Term Capital Management, Machine translation of "The spirit is willing, but the flesh is weak." to Russian and back, market fragmentation, market microstructure, Mars Rover, Metcalfe’s law, moral hazard, mutually assured destruction, Myron Scholes, natural language processing, negative equity, Network effects, optical character recognition, paper trading, passive investing, pez dispenser, phenotype, prediction markets, quantitative hedge fund, quantitative trading / quantitative finance, QWERTY keyboard, RAND corporation, random walk, Ray Kurzweil, Renaissance Technologies, Richard Stallman, risk tolerance, risk-adjusted returns, risk/return, Robert Metcalfe, Ronald Reagan, Rubik’s Cube, semantic web, Sharpe ratio, short selling, Silicon Valley, Small Order Execution System, smart grid, smart meter, social web, South Sea Bubble, statistical arbitrage, statistical model, Steve Jobs, Steven Levy, Tacoma Narrows Bridge, the scientific method, The Wisdom of Crowds, time value of money, too big to fail, transaction costs, Turing machine, Upton Sinclair, value at risk, Vernor Vinge, yield curve, Yogi Berra, your tax dollars at work

With nearly 10,000 publicly traded companies, and given the reduction in research coverage for companies outside the large indexes, the collective set of financial analysts and reporters are hard-pressed to follow them all on a timely basis. Quality of Governance and SEC Text Of course it is possible, and generally a good idea, to consider content as well. The SEC provides a rich source for this approach. Companies’ 8-K filings are for “extraordinary events,” including resignations of officers and directors, mergers, acquisitions, and changes in capital structure. Financial research has shown that better quality of corporate governance is associated with better returns. Automated extraction tools are capable of monitoring directors’ activities, audit reports, and legal troubles. When a specialized spider goes beyond retrieving information and scans it for content, it acts as an early warning Nerds on Wall Str eet S&P 1500 Stocks Relative to S&P 1500 Index Cumulative Abnormal Return 0.02 0.00 0.02 0.04 54 Best 2 3 4 Worst Governance Quality Index Quintile Figure 2.14 Cumulative Abnormal Return (CAR) over 2002.

Board member concentration quintiles and return relative to S&P 1500 index, 2002. The “too good to be true?” The Heidi Klum or bar charts? Source: David Leinweber and Jacob Sisk, unpublished work, 2003. system for events that may show up in tomorrow’s paper, or next week’s. Thinly followed firms may not show up in the news at all. But they do show up in investment performance. When information extracted from SEC filings for the S&P 1500 is combined to rank corporate governance and relate it to stock returns, the picture is remarkable. As seen in Figure 2.14, companies ranked in the top 20 percent using measures of board stability outperformed companies in the worst 20 percent by over 7 percent in 2002 alone. This is the Heidi Klum of bar charts; it looks so perfect that one suspects something odd or artificial is going on, like graphing the row numbers. If the guys at NASA can mix up meters with feet and misplace their $100 million babies on Mars, it is maybe just possible that we mixed up some data.

With nearly 10,000 publicly traded companies, and given the reduction in research coverage for companies outside the large indexes, the collective set of financial analysts and reporters are hard-pressed to follow them all on a timely basis. The Text Fr ontier 221 Quality of Governance and Molecular SEC Search Another example of molecular search can be used to test the idea that better quality of corporate governance is associated with better returns. In the previous example, the related filing entities were extracted from the primary firms’ 10-Ks, and the full set of filings collected. In a similar vein, we can extract the names of members of the board of directors from the 10-Ks of all filing firms, and then count up the number of boards each director sits on. The simple measure of quality of governance from this data is just the average number of boards on which all the directors of a given firm serve.


pages: 490 words: 117,629

Unconventional Success: A Fundamental Approach to Personal Investment by David F. Swensen

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asset allocation, asset-backed security, capital controls, cognitive dissonance, corporate governance, diversification, diversified portfolio, fixed income, index fund, law of one price, Long Term Capital Management, market bubble, market clearing, market fundamentalism, money market fund, passive investing, Paul Samuelson, pez dispenser, price mechanism, profit maximization, profit motive, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, shareholder value, Silicon Valley, Steve Ballmer, survivorship bias, technology bubble, the market place, transaction costs, Vanguard fund, yield curve, zero-sum game

Alignment of Interests As a first approximation, alignment of interests between U.S. investors and foreign corporations resembles the alignment to the relationship between U.S. investors and U.S. corporations. Generally speaking, both domestically and overseas, equity investors expect corporate management to look after shareholder interests. Even though the corporate scandals at Enron and WorldCom, among others, highlighted the shortcomings of American corporate governance, the fact remains that in the United States a strong coincidence of interest exists between shareholders and management. As a broad generalization, elsewhere in the world corporate managements focus less single-mindedly on profit generation. In some countries, cultural norms lead to greater concern for the needs of other stake-holders, including workers, lenders, and the broader community.

If the offering proves difficult to distribute, perhaps the mutual-fund subsidiary could acquire shares to contribute to the success of the offering. Underwriting clients care about after-market performance. If shares perform poorly after the offering, perhaps the mutual-fund subsidiary could acquire a position in the client company to boost the share price. A corporate client of the parent company may need proxy votes to succeed in a contested takeover or to prevail in more mundane corporate governance measures. Perhaps shares held by the mutual-fund subsidiary could vote in a manner designed to satisfy the parent firm’s client.* Conflicts inevitably develop when one arm of the firm wishes to make hard-nosed, fact-based decisions about investments and another arm of the firm wishes to engage in obsequious pandering to clients. Serious investment operations do not belong under the umbrella of multiline financial services organizations.

The forty-six-page Vanguard Index Funds SAI contains information about trustee conflicts of interest, ownership of shares, and compensation for services rendered. The disclosure ranges from precise, noting that trustees each receive $108,000 annually for the basic job of overseeing 112 separate Vanguard mutual funds, to vague, showing that trustees hold shares in categories of “None,” “Up to $10,000,” “$10,001 to $50,000,” “50,001 to $100,000,” and “Over $100,000.” Investors interested in corporate governance learn of Vanguard chief executive officer John Brennan’s status as an “Interested Trustee,” as well as his shareholding—or lack thereof—in the Vanguard equity funds.30 Even though Vanguard generally makes interests of investors paramount, share owners may nevertheless wonder about the firm’s security trading policies. Only by careful examination of page B-26 of the SAI do investors detect clues to the firm’s involvement in the slimy world of soft dollars.


pages: 288 words: 16,556

Finance and the Good Society by Robert J. Shiller

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Alvin Roth, bank run, banking crisis, barriers to entry, Bernie Madoff, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, cognitive dissonance, collateralized debt obligation, collective bargaining, computer age, corporate governance, Daniel Kahneman / Amos Tversky, Deng Xiaoping, diversification, diversified portfolio, Donald Trump, Edward Glaeser, eurozone crisis, experimental economics, financial innovation, financial thriller, fixed income, full employment, fundamental attribution error, George Akerlof, income inequality, information asymmetry, invisible hand, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, land reform, loss aversion, Louis Bachelier, Mahatma Gandhi, Mark Zuckerberg, market bubble, market design, means of production, microcredit, moral hazard, mortgage debt, Myron Scholes, Occupy movement, passive investing, Ponzi scheme, prediction markets, profit maximization, quantitative easing, random walk, regulatory arbitrage, Richard Thaler, Right to Buy, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, selection bias, self-driving car, shareholder value, Sharpe ratio, short selling, Simon Kuznets, Skype, Steven Pinker, telemarketer, The Market for Lemons, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, Vanguard fund, young professional, zero-sum game, Zipcar

Yugoslav economist Milovan Djilas, in his 1957 book The New Class: An Analysis of the Communist System, showed frank parallels between executive behavior in communist countries and that in western countries.10 His criticism of the communist system derailed Djilas’ hopes of succeeding Josip Broz Tito as leader of Yugoslavia. It candidly exposed problems, including the reward system for government executives—a system that resembled the bonus system of western corporations. Government officials would receive an expensive house and other perks if they performed well. Communist managers form a crony system to milk the enterprise to their own advantage, just as certain managers do in capitalist countries. David Granick, in his 1960 book The Red Executive, pointed out many more parallels between the Soviet nomenklatura and the western nancial class. Business management in the Soviet Union relied on party committees, city committees, and regional committees who had an interest in the success of an enterprise and who played much the same role that stockholders and their appointed boards of directors do in western countries: choosing, motivating, and sometimes disciplining managers.11 The Soviets had rediscovered the advantages of a system that awarded incentives to executives who would work hard to make an enterprise successful.12 The problem of motivating CEOs is a basic one, and di cult to solve.

Roth, Alvin E., Tayfun Sonmez, and M. Utku Unver. 2005. “Pairwise Kidney Exchange.” Journal of Economic Theory 125(2):151–88. Russett, Bruce, and John Oneal. 2001. Triangulating Peace: Democracy, Interdependence and International Organizations. New York: W. W. Norton. Saint-Exupéry, Antoine de. 2000 [1943]. The Little Prince, trans. Richard Howard. Orlando, FL: Harcourt. Salacuse, Jeswald W. 2003. “Corporate Governance, Culture and Convergence: Corporations American Style or with a European Touch?” Law and Business Review of the Americas 9:33–62, http://heinonline.org/HOL/Page? handle=hein.journals/lbramrca9&div=11&g_sent=1&collection=journals. Sala-i-Martin, Xavier. 2006. “The World Distribution of Income: Falling Poverty and … Convergence, Period.” Quarterly Journal of Economics 121(2):351–97. Sargent, Frederic O. 1961.

See lobbyists Congressional Budget Office, 89 conspicuous consumption, 166, 191 conspiracies, 232 Consumer Financial Protection Bureau, 91, 154 consumer price index units of account, 147. See also inflation consumption: conspicuous, 166, 191; diminishing marginal utility, 197; positional, 190–92; taxes on, 192, 253n14 (Chapter 27) continuous-workout mortgages, 117, 148 contracts, 82, 150 contributions. See philanthropy conventionality, impulse to, 63, 143–44, 149, 151, 153 corporate governance, 24–25. See also boards of directors corporate stock. See stocks corporations: acquisitions, 46; bank loans, 42; benefit, 121–22, 208; broadening ownership, 214–16; charters, 47–48, 121; debt, 41, 152; history, 46–48, 144; impersonality, 209–10; income taxes, 217–18; limited liability, 47, 48, 174–75; longterm value, 21; shareholders, 121; share prices, 20–21, 133, 171–72, 185–86. See also business; chief executive officers corruption, 88, 238 Countrywide Financial Corporation, 220, 255n3 creation myths, 20 credit.

How I Became a Quant: Insights From 25 of Wall Street's Elite by Richard R. Lindsey, Barry Schachter

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Albert Einstein, algorithmic trading, Andrew Wiles, Antoine Gombaud: Chevalier de Méré, asset allocation, asset-backed security, backtesting, bank run, banking crisis, Black-Scholes formula, Bonfire of the Vanities, Bretton Woods, Brownian motion, business process, buy low sell high, capital asset pricing model, centre right, collateralized debt obligation, commoditize, computerized markets, corporate governance, correlation coefficient, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, discounted cash flows, disintermediation, diversification, Donald Knuth, Edward Thorp, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, financial innovation, fixed income, full employment, George Akerlof, Gordon Gekko, hiring and firing, implied volatility, index fund, interest rate derivative, interest rate swap, John von Neumann, linear programming, Loma Prieta earthquake, Long Term Capital Management, margin call, market friction, market microstructure, martingale, merger arbitrage, Myron Scholes, Nick Leeson, P = NP, pattern recognition, Paul Samuelson, pensions crisis, performance metric, prediction markets, profit maximization, purchasing power parity, quantitative trading / quantitative finance, QWERTY keyboard, RAND corporation, random walk, Ray Kurzweil, Richard Feynman, Richard Feynman, Richard Stallman, risk-adjusted returns, risk/return, shareholder value, Sharpe ratio, short selling, Silicon Valley, six sigma, sorting algorithm, statistical arbitrage, statistical model, stem cell, Steven Levy, stochastic process, systematic trading, technology bubble, The Great Moderation, the scientific method, too big to fail, trade route, transaction costs, transfer pricing, value at risk, volatility smile, Wiener process, yield curve, young professional

In addition to the Handbook of Alternative Assets, Mark has published three financial textbooks and more than 80 research articles on the topics of separating beta from alpha, institutional fund management, business models for the asset management industry, corporate governance, hedge funds, real estate, currency overlay, credit risk, private equity, risk management, and asset allocation. He serves on editorial and advisory boards for the Journal of Portfolio Management, Journal of Alternative Investments, Journal of Private Equity, Journal of Investment Consulting, and Journal of Derivatives Accounting, and on advisory and executive committees for the New York Stock Exchange, Euronext, MSCI-Barra International Indexes, the International Association of Financial Engineers, The CFA Institute’s Task Force on Corporate Governance, The CFA Institute’s Committee on Global Investment Performance Standards, The Conference Board Commission on Public Trust, The Center for Excellence in Accounting and Security Analysis at Columbia University, The Dow Jones-AIG Commodity Index Board, and the National Association of State Investment Officers.

He has taught in the Courant master’s in math finance program since 1998 and is the author of Financial Risk Management: A Practitioner’s Guide to Managing Market and Credit Risk, and coauthor of Valuing Fixed Income Investments and Derivative Securities. Mark Anson is the chief executive officer of the British Telecommunications Pension Scheme (BTPS) and the chief executive officer of 363 P1: OTE/PGN JWPR007-Lindsey 364 P2: OTE May 29, 2007 19:6 ABOUT THE CONTR IBUTORS Hermes Pensions Management Ltd. He is also chairman of the board of the International Corporate Governance Network, the largest organization in the world dedicated to better governance of public corporations. Dr. Anson previously served as the chief investment officer at the California Public Employees’ Retirement System (CalPERS). He implemented the concept of separating beta from alpha, which generated over $9 billion of excess returns for CalPERS. He received a law degree from Northwestern University and a PhD and master’s in finance from the Columbia University Graduate School of Business.


pages: 566 words: 163,322

The Rise and Fall of Nations: Forces of Change in the Post-Crisis World by Ruchir Sharma

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3D printing, Asian financial crisis, backtesting, bank run, banking crisis, Berlin Wall, Bernie Sanders, BRICs, business climate, business process, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, centre right, colonial rule, Commodity Super-Cycle, corporate governance, creative destruction, crony capitalism, currency peg, dark matter, debt deflation, deglobalization, deindustrialization, demographic dividend, demographic transition, Deng Xiaoping, Doha Development Round, Donald Trump, Edward Glaeser, Elon Musk, eurozone crisis, failed state, Fall of the Berlin Wall, falling living standards, Francis Fukuyama: the end of history, Freestyle chess, Gini coefficient, hiring and firing, income inequality, indoor plumbing, industrial robot, inflation targeting, Internet of things, Jeff Bezos, job automation, John Markoff, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, labor-force participation, liberal capitalism, Malacca Straits, Mark Zuckerberg, market bubble, mass immigration, megacity, Mexican peso crisis / tequila crisis, mittelstand, moral hazard, New Economic Geography, North Sea oil, oil rush, oil shale / tar sands, oil shock, pattern recognition, Paul Samuelson, Peter Thiel, pets.com, Plutocrats, plutocrats, Ponzi scheme, price stability, Productivity paradox, purchasing power parity, quantitative easing, Ralph Waldo Emerson, random walk, rent-seeking, reserve currency, Ronald Coase, Ronald Reagan, savings glut, secular stagnation, Shenzhen was a fishing village, Silicon Valley, Silicon Valley startup, Simon Kuznets, smart cities, Snapchat, South China Sea, sovereign wealth fund, special economic zone, spectrum auction, Steve Jobs, The Future of Employment, The Wisdom of Crowds, Thomas Malthus, total factor productivity, trade liberalization, trade route, tulip mania, Tyler Cowen: Great Stagnation, unorthodox policies, Washington Consensus, WikiLeaks, women in the workforce, working-age population

Though I would argue that in general heavy concentrations of family wealth are a bad sign for an economy, one has to be careful to drill down into the sources of family wealth. In many countries, new billionaires often arise within older companies and have seen their wealth building toward the billionaire mark for many years, in some cases for many generations. In these cases, blood ties may not be the enemy of clean and open corporate governance, particularly in cases where the family has stepped back to play an ownership and oversight role in a publicly traded company, leaving the management of the company in professional hands. This can be a strong combination because the family keeps the company focused on the long term, and the market keeps it open to scrutiny. This, for example, is the model in Germany, were billionaire families control some of the world’s most productive companies, including many of the Mittelstand companies that drive the flourishing manufactured export sector and are more a source of pride than resentment.

For all the talk in recent years of the economic rise of a new Asia, many of its leading tycoons still emerge from within family companies and conglomerates, and here their reputation is decidedly mixed. In South Korea many of the tycoons derive their fortunes from family holdings in large companies like Samsung and Hyundai and count as good billionaires in the sense that their money comes from productive industries. On the other hand, stocks in these companies continue to sell at a discount compared to peers in other countries, due in part to lingering doubts related to their corporate governance or treatment of minority shareholders. There is also growing public concern that South Korea’s commercial life is ruled by a self-perpetuating elite bound by blood ties. Despite the fact that South Korean billionaires control wealth of very limited scale relative to the size of the economy, and operate almost entirely outside the rent-seeking industries, the dominance of family fortunes in the billionaire class helps explain why in recent years inequality has surfaced as a political issue in Seoul.

Batson, Andrew. “China: Can Reforms Revitalize the Private Sector?” Gavekal Dragonomics, October 16, 2014. Chang, Ha Joon. “State Owned Enterprise Reform.” United Nations, Department of Economic and Social Affairs, 2007. Coase, Ronald, and Ning Wang, How China Became Capitalist. London: Palgrave Macmillan, 2012. D’Souza, Juliet, William Megginson, and Robert Nash. “The Effects of Changes in Corporate Governance and Restructuring on Operating Performance: Evidence from Privatizations.” Global Finance Journal, 2005. Ezdi, Asif. “Dealing with Dual Nationality.” News International, November 14, 2014. Feteha, Ahmed. “Welcome to Egypt’s Fake Weddings: Get High, Leave Lots of Cash.” Bloomberg June 23, 2015. Gonzalez-Garcia, Jesus, and Francesco Grigoli. “State Owned Banks and Fiscal Discipline.” International Monetary Fund, October 2013.


pages: 515 words: 142,354

The Euro: How a Common Currency Threatens the Future of Europe by Joseph E. Stiglitz, Alex Hyde-White

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bank run, banking crisis, barriers to entry, battle of ideas, Berlin Wall, Bretton Woods, capital controls, Carmen Reinhart, cashless society, central bank independence, centre right, cognitive dissonance, collapse of Lehman Brothers, collective bargaining, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, currency peg, dark matter, David Ricardo: comparative advantage, disintermediation, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial innovation, full employment, George Akerlof, Gini coefficient, global supply chain, Growth in a Time of Debt, housing crisis, income inequality, incomplete markets, inflation targeting, information asymmetry, investor state dispute settlement, invisible hand, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour market flexibility, labour mobility, light touch regulation, manufacturing employment, market bubble, market friction, market fundamentalism, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mortgage debt, neoliberal agenda, new economy, open economy, paradox of thrift, pension reform, pensions crisis, price stability, profit maximization, purchasing power parity, quantitative easing, race to the bottom, risk-adjusted returns, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, Silicon Valley, sovereign wealth fund, the payments system, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, transfer pricing, trickle-down economics, Washington Consensus, working-age population

Many of the key investment opportunities (infrastructure and technology) are long-term investments. It is perhaps not a surprise that shortsighted financial markets are unable to intermediate well between long-term savers and long-term investments. There are reforms in the legal, regulatory, and tax frameworks of Europe that would help focus the financial sector on the long-term—and on doing what it should do, and not doing what it shouldn’t.32 (2) REFORMING CORPORATE GOVERNANCE Firms, too, have become increasingly shortsighted, focusing on quarterly returns. A firm focused on the next quarter won’t make important long-term investments in research and technology, in plant and equipment, and, most importantly, in its employees. A firm that pays its CEOs and other executives excessively, and distributes too much to its shareholders through dividends and share buybacks, won’t have enough money left over either to pay its workers decently or to invest in the future.

Some of Europe’s institutions—like “social partners” stakeholder capitalism, where firms are not exclusively focused on the well-being of shareholders, narrowly defined—have successfully proven a bulwark against the extremes found in the United States, where CEO pay has now risen to be 300 times that of the typical worker.33 There are, however, other factors that have contributed to rampant short-termism—for instance, the growth of stock options within the compensation packages of executives. While corporate executives claim that they are an important part of their incentive system, there is in fact little relationship between pay and performance: the stock of an airline will go up, for instance, when the price of oil goes down. Stocks more generally go up when the interest rate decreases. The growth of stock options in turn is related to deficiencies in corporate governance and in the rules governing transparency and disclosure.34 Many shareholders do not realize the extent to which CEO stock options have diluted the value of their holdings. Again, there is a rich and important agenda to reform the “rules of the game.”35 This rewriting of the rules in ways that might result in firms focusing on the long-term would lead to an economy with higher and more stable growth

What may be required is a combination of carrots and sticks, incentives to behave well (specifically, to lend to SMEs) and punishments for not doing so. 31 Or through its socially destructive practices of predatory lending, market manipulation, or abusing its market power. 32 Many of the problems can be traced to the rules and regulations governing the financial system, others to tax laws that encourage speculation, still others to bankruptcy laws that encourage excessive risk-taking through derivatives and excessive consumer lending, and yet others to deficiencies in corporate governance. For the United States, see Stiglitz et al., Rewriting the Rules of the American Economy; and National Commission on the Causes of the Financial and Economic Crisis in the United States, Financial Crisis Inquiry Report. My book Freefall describes some of the general principles. 33 The Economic Policy Institute (EPI) reports that the average annual CEO compensation of the largest 350 firms in America was $16.3 million in 2014—303 times larger than that of the typical worker (“average compensation of production/nonsupervisory workers in the key industries of the firms included in the sample”).


pages: 518 words: 147,036

The Fissured Workplace by David Weil

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accounting loophole / creative accounting, affirmative action, Affordable Care Act / Obamacare, banking crisis, barriers to entry, business process, call centre, Carmen Reinhart, Cass Sunstein, Clayton Christensen, clean water, collective bargaining, commoditize, corporate governance, corporate raider, Corrections Corporation of America, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, declining real wages, employer provided health coverage, Frank Levy and Richard Murnane: The New Division of Labor, George Akerlof, global supply chain, global value chain, hiring and firing, income inequality, information asymmetry, intermodal, inventory management, Jane Jacobs, Kenneth Rogoff, law of one price, loss aversion, low skilled workers, minimum wage unemployment, moral hazard, Network effects, new economy, occupational segregation, Paul Samuelson, performance metric, pre–internet, price discrimination, principal–agent problem, Rana Plaza, Richard Florida, Richard Thaler, Ronald Coase, shareholder value, Silicon Valley, statistical model, Steve Jobs, supply-chain management, The Death and Life of Great American Cities, The Nature of the Firm, transaction costs, ultimatum game, union organizing, women in the workforce, Y2K, yield management

One reason is that performance-based compensation policies (and the academic literature that justified them) generally assume an “arm’s-length model of bargaining” between the CEO and top executives on one hand and the board of directors on the other in setting up incentive schemes. The reality, as researchers like Lucian Bebchuk and Jesse Fried demonstrated, is far different; there are a variety of reasons that the relationship between executives and directors is far more intertwined than suggested by the arm’s-length model often assumed in corporate governance.22 As a result of both the intended performance effects and the hidden self-dealing built into many compensation systems, executive compensation dramatically increased the earning of top corporate leaders relative to others. The ratio between the pay received by the average CEO in total direct compensation and that of the average production worker went from 37.2:1 in 1979 to an astounding 277:1 in 2007.

Total net assets of ETFs went from $83 billion in 2001 to $608 billion in 2007 to $1.05 trillion in 2011. ETFs held $229 billion in large-cap domestic stocks and $89 billion in mid-cap and small-cap domestic stocks. See ibid., figures 3.7, 3.1, and 3.6, respectively. 13. This influence goes beyond buying and selling of shares, but also directly from the role that institutional investors play in corporate governance via the exercise of voting rights, influence on who holds seats on boards of directors, as well as activities in other governance forums. 14. Although the terms are often used in popular discussions interchangeably, private equity funds and hedge funds differ in a number of important respects. Both financial organizations historically primarily served very large institutional investors and operate in a relatively unregulated environment compared to banks, mutual funds, or investment banks.

Center for Urban Economic Development, University of Illinois Chicago / National Employment Law Project / UCLA Institute for Research on Labor and Employment. Bernstein, Peter. 1992. Capital Ideas: The Improbable Origins of Modern Wall Street. New York: The Free Press. Bewley, Truman. 1999. Why Wages Don’t Fall during a Recession. Cambridge, MA: Harvard University Press. Blair, Margaret. 1995. Ownership and Control: Rethinking Corporate Governance for the Twenty-First Century. Washington, DC: Brookings Institution. Blair, Roger D., and Francine Lafontaine. 2005. The Economics of Franchising. New York: Cambridge University Press. Blanchflower, David, and Alex Bryson. 2010. “The Wage Impact of Trade Unions in the UK Public and Private Sectors.” Economica 77, no. 305: 92–109. Blank, Rebecca, and David Card. 1991. “Recent Trends in Insured and Uninsured Employment: Is There an Explanation?”


pages: 464 words: 155,696

Becoming Steve Jobs: The Evolution of a Reckless Upstart Into a Visionary Leader by Brent Schlender, Rick Tetzeli

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Albert Einstein, Apple II, Apple's 1984 Super Bowl advert, Bill Gates: Altair 8800, Bob Noyce, Byte Shop, computer age, corporate governance, El Camino Real, Isaac Newton, John Markoff, Jony Ive, Marc Andreessen, market design, McMansion, Menlo Park, Paul Terrell, popular electronics, QWERTY keyboard, Ronald Reagan, Sand Hill Road, side project, Silicon Valley, Silicon Valley startup, skunkworks, Steve Ballmer, Steve Jobs, Steve Wozniak, Steven Levy, Stewart Brand, Tim Cook: Apple, Wall-E, Watson beat the top human players on Jeopardy!, Whole Earth Catalog

Ruling the market for new consumer electronics devices might have solved Gates’s biggest problem: the fact that Microsoft was no longer growing at the galloping 25-plus percent pace investors like to see in a tech company. Remember that when Bill and Steve got into the business, computing still belonged to the IBMs and DECs of the world, with their big, expensive machines sold into a market consisting of a few hundred corporations, governments, and universities. As Moore’s law drove prices down, PC manufacturers sold their wares to a galaxy of other businesses, both big and small, that could now afford powerful computing that would make them more efficient. But numerically speaking, the biggest potential audience of all was relatively untapped. Once you can sell computing to consumers directly, and once you get computing into products that become part of their everyday lives, the volumes become transformative.

ALL HIS LIFE, Steve had tried to control the narrative about Apple by being the sole employee to tell its story to the public. There was a cost to this choice that didn’t really become apparent until the last years of Steve’s life, when his notoriety and Apple’s success drew attention to Cupertino as never before. Apple became the lightning rod for everything from criticism of the tech industry’s sustainability problems to corporate governance controversies that affected many other companies as well. And its spokesman was a mortally unhealthy man with a desperate impatience to deal with things that really mattered to him, not this broad array of nagging distractions. Ever since getting sick in 2004, Steve had kept goals in his head of things he wanted to be alive for. Some were personal, like the school graduations of his kids.

Dealing with the media circus that erupted in 2010 when a technology blog came into possession of an iPhone 4 prototype that a young Apple engineer left in a bar was nowhere on Steve’s list. Nor was flying back from a Hawaii vacation to manage an uproar that became known as “Antennagate,” the result of the discovery that the iPhone 4, if held at certain angles, would drop calls more frequently than past iPhones. And he had only passing sensitivity to corporate governance issues. Yet all these incidents, and more, added to the already immense task he faced of managing a sprawling international company with nearly fifty thousand employees during these years when he was quite truly dying. It is part of the CEO’s job description to manage such distractions, and Steve was not particularly good at this even when he was healthy. He had always been impatient. But the cancer was exhausting him and bringing the kind of wearing pain he had never before experienced.

The End of Power: From Boardrooms to Battlefields and Churches to States, Why Being in Charge Isn’t What It Used to Be by Moises Naim

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additive manufacturing, barriers to entry, Berlin Wall, bilateral investment treaty, business process, business process outsourcing, call centre, citizen journalism, Clayton Christensen, clean water, collapse of Lehman Brothers, collective bargaining, colonial rule, conceptual framework, corporate governance, creative destruction, crony capitalism, deskilling, disintermediation, don't be evil, failed state, Fall of the Berlin Wall, financial deregulation, Francis Fukuyama: the end of history, illegal immigration, immigration reform, income inequality, income per capita, intangible asset, intermodal, invisible hand, job-hopping, Joseph Schumpeter, Julian Assange, Kickstarter, liberation theology, Martin Wolf, mega-rich, megacity, Naomi Klein, Nate Silver, new economy, Northern Rock, Occupy movement, open borders, open economy, Peace of Westphalia, Plutocrats, plutocrats, price mechanism, price stability, private military company, profit maximization, Ronald Coase, Ronald Reagan, Silicon Valley, Skype, Steve Jobs, The Nature of the Firm, Thomas Malthus, too big to fail, trade route, transaction costs, Washington Consensus, WikiLeaks, World Values Survey, zero-sum game

After all, a lost election can always be won back, but new rules change the game.4 Ultimately, barriers to power are the obstacles that stop new players from deploying enough of the muscle, the code, the pitch, and the reward, or some combination thereof, to gain a competitive hold; and, conversely, that allow incumbent companies, parties, armies, churches, foundations, universities, newspapers, and unions (or whatever other type of organization is involved) to maintain their dominance. For many decades, even centuries, barriers to power sheltered massive armies, corporations, governments, parties, and social and cultural institutions. Now, those barriers are crumbling, eroding, leaking, or being rendered otherwise irrelevant. To appreciate just how profound this transformation is, and how much it reverses the tide of history, we need to review why and how power got big in the first place. The next chapter explains how, by the twentieth century, the world got to the point where—according to the conventional wisdom— power required size, and no better, more effective, and more sustainable way existed to 38 exercise power than through large centralized and hierarchical organizations. 39 CHAPTER THREE HOW POWER GOT BIG An Assumption’s Unquestioned Rise 1648, WHEN the Peace of Westphalia ushered in the modern nation-state, in place of the post-medieval order of city-states and overlapping principalities?

CHAPTER THREE 1. LaFeber, The Cambridge History of American Foreign Relations, Volume 2: The American Search for Opportunity, 1865–1913, p. 186. 2. Adams, The Education of Henry Adams: An Autobiography, p. 500. 3. Chandler, The Visible Hand: The Managerial Revolution in American Business; see also Chandler, Scale and Scope: The Dynamics of Industrial Capitalism. 4. Lewis et al., Personal Capitalism and Corporate Governance: British Manufacturing in the First Half of the Twentieth Century. See also Micklethwait and Wooldridge, The Company: A Short History of a Revolutionary Idea. 5. Alan Wolfe, “The Visitor,” The New Republic, April 21, 2011. 6. See “Max Weber” entry in Concise Oxford Dictionary of Politics, p. 558. 7. See “Max Weber” entry in Encyclopaedia Britannica, Vol. 12, p. 546. 8. Wolfgang Mommsen, “Max Weber in America,” American Scholar, June 22, 2000. 9.

The Cambridge History of American Foreign Relations, Vol. 2: The American Search for Opportunity, 1865–1913. Cambridge, MA: Cambridge University Press, 1995. Larkin, Philip. “Annus Mirabilis.” Collected Poems. New York: Farrar, Straus & Giroux, 1988. Leebaert, Derek. The Fifty-Year Wound: The True Price of America’s Cold War Victory. Boston: Little, Brown and Company, 2002. Lewis, Myrddin John, Roger Lloyd-Jones, Josephine Maltby, and Mark Matthews. Personal Capitalism and Corporate Governance: British Manufacturing in the First Half of the Twentieth Century. Surrey, UK: Ashgate Farn ham, 2011. Lind, William S., Keith Nightengale, John F. Schmitt, Joseph W. Sutton, and Gary I. Wilson. “The Changing Face of War: Into the Fourth Generation.” Marine Corps Gazette (1989). Lynn, Barry. Cornered: The New Monopoly Capitalism and the Economics of Destruction. New York: Wiley, 2010. Lynn, Barry, and Phillip Longman.


pages: 1,042 words: 266,547

Security Analysis by Benjamin Graham, David Dodd

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activist fund / activist shareholder / activist investor, asset-backed security, backtesting, barriers to entry, capital asset pricing model, carried interest, collateralized debt obligation, collective bargaining, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, diversified portfolio, fear of failure, financial innovation, fixed income, full employment, index fund, intangible asset, invisible hand, Joseph Schumpeter, locking in a profit, Long Term Capital Management, low cost carrier, moral hazard, mortgage debt, Myron Scholes, p-value, Right to Buy, risk-adjusted returns, risk/return, secular stagnation, shareholder value, The Chicago School, the market place, the scientific method, The Wealth of Nations by Adam Smith, transaction costs, zero-coupon bond

Finally, it is difficult to vote proxies for foreign holdings as custodians often are notified of corporate actions late or not at all by their foreign subcustodians. Despite a litany of administrative and technical difficulties that remain even to this day, concerns regarding corporate governance and securities regulation are overblown. International corporate governance protections for investors, especially in Europe, increasingly resemble those in the United States. Nonexecutive board chairs exist in practice in many countries, a trend that is gaining steam in the United States. Additionally, although European markets lack new mandates for corporate board conduct such as those recently promulgated in the United States under Sarbanes-Oxley, the reality is that their principles-based systems of corporate governance provide every bit as much protection as our country’s rules-based structure. “Be Right Once”: Weetabix I always approach investing with a mindset that Warren Buffett once described as “being right once.”

McDonald regaled us with “war stories” about his own experiences investing abroad. Even as recently as the 1980s, foreign investing was difficult. By U.S. standards, overseas markets were illiquid and trading costs high. Accounting practices were foreign, to say the least, and disclosure was less transparent than in the United States. That was not all. Consider the challenges posed to the would-be global investor by local corporate governance and management practices; restrictions on capital movements; variations in taxation; differences in language, culture, and political stability; unusual hours at which trades are executed; complexity of foreign exchange transactions; currency risks; and logistics involved in managing custody of foreign securities. Why bother? Oddly enough, it was Omaha, Nebraska’s Warren Buffett who cleared a path for me through this minefield.

Graham and Dodd—and Buffett—are properly concerned with the tendency of some managements to cling tightly to corporate assets, to withhold dividends, and to make acquisitions whose sole purpose seems to be to increase the prestige and salaries of management. That is why Buffett looks for managers who emphasize the long-term protection and enhancement of their business franchises and are primarily concerned with the effectiveness of a company’s capital allocation process. When investing in foreign companies, you really need the kind of managers that Buffett covets because corporate governance rules and management practices are generally less responsive to shareholder concerns than they are in the United States. If management does not get it right, you cannot count on your fellow shareholders to make it happen. Also, while cultural and language differences make it difficult to render judgments based on direct contact with overseas managers, management’s long-term record is available.


pages: 316 words: 91,969

Gray Lady Down: What the Decline and Fall of the New York Times Means for America by William McGowan

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affirmative action, Affordable Care Act / Obamacare, corporate governance, David Brooks, East Village, friendly fire, haute couture, illegal immigration, immigration reform, liberation theology, medical residency, New Journalism, obamacare, payday loans, postnationalism / post nation state, pre–internet, uranium enrichment, yellow journalism, young professional

Unfortunately for the Times, a failure to correct its biases has converged with a financial crisis of existential proportions, one that dwarfs the downturn of the 1970s when Abe Rosenthal had his nightmares about waking up one morning and there being no New York Times. The fact that it is a time of wrenching change in the newspaper industry as a whole offers no consolation. A series of newsroom embarrassments and a consistent pattern of bias have hurt the Times as a brand, and this, along with a dubious business strategy, has made it more vulnerable to the depredations of Wall Street. This could mean that the Times and its unique corporate governance, with the Sulzbergers dominating the board and the shareholding structure, may not survive in their current form. During the flush years of the 1990s and early 2000s, the Times made several bad business decisions that now weigh heavily on its balance sheet. It bought the Boston Globe in 1993 and then tried to sell it, but stepped back after the bids were deemed too low. It passed up an opportunity to invest in Google, and also passed on a chance to buy part of Amazon.com because the move would have alienated one of its biggest advertisers, Barnes and Noble.

There’s energy and loud argument, but hard information and neutral reporting are not this medium’s strong suit. An inherent fragmentation and multiplicity, not to mention problems with factual accuracy, make it difficult for the blogosphere to provide the common ground that helps cement a shared sense of civic mission, especially on a national level, or the critical institutional counterweight to the power of corporations, government, vested political interests and self-involved politicians. The Times will not be so easily replaced, which makes its decline—and perhaps even its fall—more worrisome. But if the era we are passing through still demands something like the Times, it also cries out for a much better version of the Times than is being produced by the current regime. The new Times headquarters, since 2008, is a far cry from the now somewhat seedy Victorian digs of the past.


pages: 334 words: 98,950

Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism by Ha-Joon Chang

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affirmative action, Albert Einstein, Big bang: deregulation of the City of London, bilateral investment treaty, borderless world, Bretton Woods, British Empire, Brownian motion, call centre, capital controls, central bank independence, colonial rule, Corn Laws, corporate governance, David Ricardo: comparative advantage, Deng Xiaoping, Doha Development Round, en.wikipedia.org, falling living standards, Fellow of the Royal Society, financial deregulation, fixed income, Francis Fukuyama: the end of history, income inequality, income per capita, industrial robot, Isaac Newton, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, labour mobility, land reform, liberal world order, liberation theology, low skilled workers, market bubble, market fundamentalism, Martin Wolf, means of production, mega-rich, moral hazard, offshore financial centre, oil shock, price stability, principal–agent problem, Ronald Reagan, South Sea Bubble, structural adjustment programs, The Wealth of Nations by Adam Smith, trade liberalization, transfer pricing, urban sprawl, World Values Survey

They branched out into areas like government budgets, industrial regulation, agricultural pricing, labour market regulation, privatization and so on. In the 1990s, there was a further advance in this ‘mission creep’ as they started attaching so-called governance conditionalities to their loans. These involved intervention in hitherto unthinkable areas, like democracy, government decentralization, central bank independence and corporate governance. This mission creep raises a serious issue. The World Bank and the IMF initially started with rather limited mandates. Subsequently, they argued that they have to intervene in new areas outside their original mandates, as they, too, affect economic performance, a failure in which has driven countries to borrow money from them. However, on this reasoning, there is no area of our life in which the BWIs cannot intervene.

Developing countries should open their capital markets, it is argued by the Bad Samaritans, so that such money can flow in freely. The benefit of having free international movement of capital, neo-liberal economists argue, does not stop at plugging such a ‘savings gap’. It improves economic efficiency by allowing capital to flow into projects with the highest possible returns on a global scale. Free cross-border capital flows are also seen as spreading ‘best practice’ in government policy and corporate governance. Foreign investors would simply pull out, the reasoning goes, if companies and countries were not well run.2 Some even, controversially, argue that these ‘collateral benefits’ are even more important than the direct benefits that come from the more efficient allocation of capital.3 Foreign capital flows into developing countries consist of three main elements – grants, debts and investments.


pages: 363 words: 101,082

Earth Wars: The Battle for Global Resources by Geoff Hiscock

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Admiral Zheng, Asian financial crisis, Bakken shale, Bernie Madoff, BRICs, butterfly effect, clean water, cleantech, corporate governance, demographic dividend, Deng Xiaoping, Edward Lorenz: Chaos theory, energy security, energy transition, eurozone crisis, Exxon Valdez, flex fuel, global rebalancing, global supply chain, hydraulic fracturing, Long Term Capital Management, Malacca Straits, Masdar, mass immigration, megacity, Menlo Park, Mohammed Bouazizi, new economy, oil shale / tar sands, oil shock, Panamax, Pearl River Delta, purchasing power parity, Ralph Waldo Emerson, RAND corporation, Shenzhen was a fishing village, Silicon Valley, smart grid, South China Sea, sovereign wealth fund, special economic zone, spice trade, trade route, uranium enrichment, urban decay, working-age population, Yom Kippur War

They include one-time oil and media magnate Boris Berezovsky—who fled to London in 2001 and remains a political refugee there—and Mikhail Khodorkovsky, the former YUKOS oil company chief executive who was arrested in 2003 and jailed in 2005 for nine years (later reduced to eight) after he was convicted of fraud, tax evasion, embezzlement, and money laundering. YUKOS—once lauded as a shining example of how a Russian oil company could be transformed to meet Western standards of financial reporting and corporate governance—was seized by the Russian state in 2004 and dismantled, with various pieces going to state-owned companies Rosneft and Gazprom. Khodorkovsky once vowed to use his money to bring about political change in Russia, but he now sits in a Siberian jail and says there is “no such thing as free elections, freedom of expression, or rule of law in Russia today.”8 Also London-based is Roman Abramovich, a former business partner of Berezovsky at Sibneft, the Russian oil company the pair created in 1995 through the privatisation of state-owned assets.

Indonesia’s economy is among the fastest growing in Asia in 2011–2012, but little more than a decade ago the country was locked in a high-inflation, low-growth pattern that followed the 1997–1998 economic crisis. To make the most of its resources, Indonesia needs better infrastructure, better government services, better education, more jobs for its young people, better health care, a greater emphasis on upgrading human skills and, in the eyes of many investors, better corporate governance to encourage more finance and technology from outside. Despite the efforts of President Susilo Bambang Yudhoyono’s administration since 2004, corruption remains entrenched in the bureaucracy, and the country ranks 100th on Transparency International’s 2011 corruption perception index. The World Bank ranks it 122nd in “ease of doing business,” well behind China (but ahead of India). Even so, it is a country of immense possibilities and is by far the most important economy in Southeast Asia.

How to Form Your Own California Corporation by Anthony Mancuso

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corporate governance, corporate raider, distributed generation, estate planning, information retrieval, intangible asset, passive income, passive investing, Silicon Valley

That’s because the corporate form has a number of built-in activity layers—shareholders, directors, officers, and employees—that allow a number of people to easily and sensibly participate financially and managerially in its operations. Financial participation by others, which can take a variety of forms, is part and parcel of the corporate package. An investor can lend money to the corporation, or invest in its stock, and shares can be split into different classes and series to allow different types of investors to obtain different financial benefits and voices in corporate governance. For example, some investors may wish to purchase shares that give them preferential treatment in a distribution of corporate assets when the corporation is wound up; others may want first rights to the distribution of dividends when declared by the board. Still other investors can be granted special voting rights—for example, a right to appoint one of the members of the managing board of directors.

Incorporated businesses also have an easier time obtaining loans from banks and other capital invest­ment firms (assuming a corporation’s balance sheet and cash flow statements look good). That’s partially due to the increased structural formality of the corporation (discussed above). In addition, loans can be made part of a package where the bank or investment company obtains special rights to choose one or more board members, or has special voting prerogatives in matters of corporate governance or finance. For example, a lender may require veto power over expenditures exceeding a specified amount. The range of capital arrangements possible, even for a small corporation, is almost limitless, which helps the corporation attract outside investment. tip Employees often prefer to work for corporations. Key employees are more likely to work for a business that offers them a chance to profit if future growth is strong through the issuance of stock options and stock bonuses—financial incentives that only the corporate form can provide.


pages: 459 words: 103,153

Adapt: Why Success Always Starts With Failure by Tim Harford

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Andrew Wiles, banking crisis, Basel III, Berlin Wall, Bernie Madoff, Black Swan, car-free, carbon footprint, Cass Sunstein, charter city, Clayton Christensen, clean water, cloud computing, cognitive dissonance, complexity theory, corporate governance, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, crowdsourcing, cuban missile crisis, Daniel Kahneman / Amos Tversky, Dava Sobel, Deep Water Horizon, Deng Xiaoping, double entry bookkeeping, Edmond Halley, en.wikipedia.org, Erik Brynjolfsson, experimental subject, Fall of the Berlin Wall, Fermat's Last Theorem, Firefox, food miles, Gerolamo Cardano, global supply chain, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, Jane Jacobs, Jarndyce and Jarndyce, Jarndyce and Jarndyce, John Harrison: Longitude, knowledge worker, loose coupling, Martin Wolf, mass immigration, Menlo Park, Mikhail Gorbachev, mutually assured destruction, Netflix Prize, New Urbanism, Nick Leeson, PageRank, Piper Alpha, profit motive, Richard Florida, Richard Thaler, rolodex, Shenzhen was a fishing village, Silicon Valley, Silicon Valley startup, South China Sea, special economic zone, spectrum auction, Steve Jobs, supply-chain management, the market place, The Wisdom of Crowds, too big to fail, trade route, Tyler Cowen: Great Stagnation, web application, X Prize, zero-sum game

As the journalist Sebastian Mallaby points out, Henry’s project for Lübeck was ‘a bit like trying to build a new Chicago in modern Congo or Iraq’ – and that is pretty much what the economist Paul Romer now wants to do. Romer is the founder of the ‘charter cities’ movement, and he argues that the world needs entirely new cities with their own infrastructure and, in particular, their own rules on democracy, taxes and corporate governance. These cities, like Lübeck, would be governed by a set of rules designed to attract ambitious people. According to Mallaby, Lübeck represented ‘a formula for creating order out of chaos and prosperity amid backwardness’ in the Middle Ages. It is just such a formula that Paul Romer is now promoting. There is plenty of evidence that charter cities could work in today’s world. There’s Singapore, long a successful independent city state off the coast of Malaysia; Hong Kong, for many years a British enclave on the South China Sea; more recently, Shenzhen, thirty years ago a fishing village not far from Hong Kong, now a city to rival Hong Kong itself after being designated China’s first ‘special economic zone’.

q=node/3264; Robert Hall & Susan Woodward, ‘The right way to create a good bank and a bad bank’, VoxEU, 24 February 2009; Tim Harford, ‘A capital idea to get the banks to start lending again’, FT Magazine, 4er, 09, http://timharford.com/2009/04/a-capital-idea-to-get-the-banks-to-start-lending-again/ 207 John Kay points out that in some ways it is less meddlesome: John Kay, ‘The reform of banking regulation’, 15 September 2009, http://www.johnkay.com/2009/09/15/narrow-banking/; and author interview, September 2010. 208 ‘We cannot contemplate keeping aircraft’: John Kay, ‘Why too big to fail is too much for us to take’, Financial Times, 27 May 2009, http://www.johnkay.com/2009/05/27/why-%E2%80%98too-big-to-fail%E2%80%99-is-too-much-for-us-to-take/ 208 This one cost £200 million: Leo Lewis, ‘Exchange chief resigns over “fat finger” error’, The Times, 21 December 2005, http://business.timesonline.co.uk/tol/business/markets/japan/article775136.ece 210 Includes all the famous scandals such as WorldCom: Alexander Dyck, Adair Morse & Luigi Zingales, ‘Who blows the whistle on corporate fraud?’, European Corporate Governance Institute Finance Working Paper No. 156/2007, January 2007, http://faculty.chicago booth.edu/finance/papers/Who%20Blows%20The%20Whistle.pdf 211 He says that he was thanked by the Chairman: HBOS Whistleblower Statement: http://news.bbc.co.uk/1/hi/uk_politics/7882581.stm; and Paul Moore’s interview on the Radio 4 documentary The Choice, Tuesday, 9 November 2009. 211 Moore walked out on to the street: Paul Moore took HBOS to an employment tribunal and the bank settled with him.


pages: 347 words: 99,317

Bad Samaritans: The Guilty Secrets of Rich Nations and the Threat to Global Prosperity by Ha-Joon Chang

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affirmative action, Albert Einstein, banking crisis, Big bang: deregulation of the City of London, bilateral investment treaty, borderless world, Bretton Woods, British Empire, Brownian motion, call centre, capital controls, central bank independence, colonial rule, Corn Laws, corporate governance, David Ricardo: comparative advantage, Deng Xiaoping, Doha Development Round, en.wikipedia.org, falling living standards, Fellow of the Royal Society, financial deregulation, fixed income, Francis Fukuyama: the end of history, income inequality, income per capita, industrial robot, Isaac Newton, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, labour mobility, land reform, liberal world order, liberation theology, low skilled workers, market bubble, market fundamentalism, Martin Wolf, means of production, mega-rich, moral hazard, offshore financial centre, oil shock, price stability, principal–agent problem, Ronald Reagan, South Sea Bubble, structural adjustment programs, The Wealth of Nations by Adam Smith, trade liberalization, transfer pricing, urban sprawl, World Values Survey

They branched out into areas like government budgets, industrial regulation, agricultural pricing, labour market regulation, privatization and so on. In the 1990s, there was a further advance in this ‘mission creep’ as they started attaching so-called governance conditionalities to their loans. These involved intervention in hitherto unthinkable areas, like democracy, government decentralization, central bank independence and corporate governance. This mission creep raises a serious issue. The World Bank and the IMF initially started with rather limited mandates. Subsequently, they argued that they have to intervene in new areas outside their original mandates, as they, too, affect economic performance, a failure in which has driven countries to borrow money from them. However, on this reasoning, there is no area of our life in which the BWIs cannot intervene.

Developing countries should open their capital markets, it is argued by the Bad Samaritans, so that such money can flow in freely. The benefit of having free international movement of capital, neo-liberal economists argue, does not stop at plugging such a ‘savings gap’. It improves economic efficiency by allowing capital to flow into projects with the highest possible returns on a global scale. Free cross-border capital flows are also seen as spreading ‘best practice’ in government policy and corporate governance. Foreign investors would simply pull out, the reasoning goes, if companies and countries were not well run.2 Some even, controversially, argue that these ‘collateral benefits’ are even more important than the direct benefits that come from the more efficient allocation of capital.3 Foreign capital flows into developing countries consist of three main elements – grants, debts and investments.


pages: 296 words: 86,610

The Bitcoin Guidebook: How to Obtain, Invest, and Spend the World's First Decentralized Cryptocurrency by Ian Demartino

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3D printing, AltaVista, altcoin, bitcoin, blockchain, buy low sell high, capital controls, cloud computing, corporate governance, crowdsourcing, cryptocurrency, distributed ledger, Edward Snowden, Elon Musk, ethereum blockchain, fiat currency, Firefox, forensic accounting, global village, GnuPG, Google Earth, Haight Ashbury, Jacob Appelbaum, Kevin Kelly, Kickstarter, litecoin, M-Pesa, Marc Andreessen, Marshall McLuhan, Oculus Rift, peer-to-peer, peer-to-peer lending, Ponzi scheme, prediction markets, QR code, ransomware, Satoshi Nakamoto, self-driving car, Skype, smart contracts, Steven Levy, the medium is the message, underbanked, WikiLeaks, Zimmermann PGP

Chapter 14: Day Trading Chapter 15: Altcoin Trading and Pump-and-Dumps Chapter 16: Peer-to-Peer Lending Chapter 17: Investing in Other Commodities Using Bitcoin SECTION III: WHAT CAN BITCOIN DO FOR ME? Chapter 18: Remittance Chapter 19: Microtransactions Chapter 20: Start-up Funding SECTION IV: THE FUTURE OF BITCOIN Chapter 21: Altcoins and Bitcoin 2.0 Projects Chapter 22: Distributed Autonomous Corporations, Governance, and Niche Economies Index Foreword This is my first book, so I can’t pretend to be an expert on how these things are supposed to go. What I do know is that when you sit down to write a book, you should make sure you know who your audience is. This is true about writing anything, but it is particularly true when you sit down to write 80,000 words. No one wants to look back on all that work and think to themselves, What was it all for?

February 4, 2015. Accessed June 22, 2015. http://www.coindesk.com/lead-developers-leave-overstocks-medici-project/. 9 DeMartino, Ian M. “Chat Logs Allegedly Show Bter Creating and Pumping Its Own Coin.” CoinTelegraph. January 3, 2015. Accessed June 22, 2015. http://cointelegraph.com/news/113238/chat-logs-allegedly-show-bter-creating-and-pumping-its-own-coin. Chapter 22: Distributed Autonomous Corporations, Governance, and Niche Economies I am passionate about bitcoin because I believe it is one of the most exciting inventions of the last two decades and is a platform for building de-centralized trusted applications for financial services, commerce and governance. Much more than just a currency, bitcoin is the Internet of Money. Currency is only the first app! —Andreas Antonopoulos, January 15, 2015, Reddit AMAA (Ask Me Almost Anything) The future of Bitcoin is hard to predict.


pages: 278 words: 83,504

Boeing Versus Airbus: The Inside Story of the Greatest International Competition in Business by John Newhouse

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Airbus A320, airline deregulation, Bay Area Rapid Transit, Build a better mousetrap, corporate governance, demand response, low cost carrier, upwardly mobile

For Chirac, who had campaigned strongly for it, this rejection was a stunning setback. To have lost ground to the Germans over the EADS-Airbus management issue immediately thereafter would have been a second political blow that his German partners were reluctant to deliver. Moreover, while the two parties are equal partners, the French continue to regard Airbus as a fiefdom. A year later, in June 2006, the issue of corporate governance flared up again as the second and more injurious crisis involving the A380 struck Airbus/EADS. The production problems that were slowing down the program and that management should have disposed of had become enmeshed in cross-border politics and political infighting. This time, Forgeard was in the crosshairs, especially after he initially sought to hang the blame on the German factories, then, under pressure, included a French site in his critique, and still later expressed regret at having said anything at all.

In second place was Stonecipher, with close to 2.5 million. The distant third was Condit, with about 816,000 shares.43 “So now Boeing had the two largest of its individual investors joined at the hip,” recalls Richard Aboulafia, one of the aircraft industry’s most highly respected analysts. “Both were now board members, and one was chief operating officer and president. This would make Michael Eisner blush. From a corporate governance point of view, it amounted to rank incompetence or something more sinister. In principle, there was no obstacle to the pair of them ripping the company apart for cash. In practice, that was unlikely, but the Stonecipher-McDonnell alliance could have affected Boeing’s plans for the future, and not to the advantage of the Boeing Commercial Airplanes company.”44 Not long after the merger, Larry Clarkson ran into T.

The Smartest Investment Book You'll Ever Read: The Simple, Stress-Free Way to Reach Your Investment Goals by Daniel R. Solin

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asset allocation, corporate governance, diversification, diversified portfolio, index fund, market fundamentalism, money market fund, Myron Scholes, passive investing, prediction markets, random walk, risk tolerance, risk-adjusted returns, risk/return, transaction costs, Vanguard fund, zero-sum game

Chapter 40: Where Are the Pension Plans for Smart Investors? I derived information concerning the basic principles under· lying the investment cho ices in pension and RRSP plans, and related information about these plans, from an article by Ronald B. Davis. Associate Professo r of U.B.C.. Facu lty of Law. entitled "Th e Enron Pension Jigsaw: Assemblin g 170 The Real Way Smart Investors Seal 95% orthe "Pros~ Accountable Corporate Governance by Fiduciaries," University ofBritUh Columbia Law Review, vol. 36, August 2003. Chapter 41: Have the Inmates Taken Over the Asylum? Professor Miller's observations about regulation benefiting the industry are set forth in a book written by him, entitled Merton Miller on Derivatives (New York: John Wiley & Sons, Inc.. 1997. p. 45). In an article reviewing a book by Mary G. Condon, enrided Making Disclosure: Ideas and Interests in Canadian Securities Regulation (Toronro: University of Toronto Press, 1998), Christopher C.


pages: 113 words: 37,885

Why Wall Street Matters by William D. Cohan

Apple II, asset-backed security, bank run, Bernie Sanders, bonus culture, break the buck, buttonwood tree, corporate governance, corporate raider, creative destruction, Credit Default Swap, Donald Trump, Exxon Valdez, financial innovation, financial repression, Fractional reserve banking, Gordon Gekko, greed is good, income inequality, Joseph Schumpeter, London Interbank Offered Rate, margin call, money market fund, moral hazard, Potemkin village, quantitative easing, secular stagnation, Snapchat, South Sea Bubble, Steve Jobs, Steve Wozniak, too big to fail, WikiLeaks

But these are distinctions without much of a difference, and in any event the interest the bank pays on these accounts is virtually negligible. (In a surreal twist, in some countries at the moment, you pay the bank to keep your money “safe” for you.) No matter how commercial banks dress up their behavior in a complicated lexicon, what depository institutions are in the business of doing every day is taking our deposits—for which they pay close to nothing at the moment—and then lending that money out to various corporations, governments, schools, foundations, and other organizations the world over that need or want that money—everything from General Electric to the National Basketball Association—in exchange for what they hope will be a profit based on the credit risk that business or organization poses. Commercial banks, of course, also make loans available to individuals to enable the purchase of homes, cars, and whatever else we use our credit cards to buy.


pages: 1,336 words: 415,037

The Snowball: Warren Buffett and the Business of Life by Alice Schroeder

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affirmative action, Albert Einstein, anti-communist, Ayatollah Khomeini, barriers to entry, Bob Noyce, Bonfire of the Vanities, Brownian motion, capital asset pricing model, card file, centralized clearinghouse, collateralized debt obligation, computerized trading, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, desegregation, Donald Trump, Eugene Fama: efficient market hypothesis, global village, Golden Gate Park, Haight Ashbury, haute cuisine, Honoré de Balzac, If something cannot go on forever, it will stop - Herbert Stein's Law, In Cold Blood by Truman Capote, index fund, indoor plumbing, intangible asset, interest rate swap, invisible hand, Isaac Newton, Jeff Bezos, John Meriwether, joint-stock company, joint-stock limited liability company, Long Term Capital Management, Louis Bachelier, margin call, market bubble, Marshall McLuhan, medical malpractice, merger arbitrage, Mikhail Gorbachev, money market fund, moral hazard, NetJets, new economy, New Journalism, North Sea oil, paper trading, passive investing, Paul Samuelson, pets.com, Plutocrats, plutocrats, Ponzi scheme, Ralph Nader, random walk, Ronald Reagan, Scientific racism, shareholder value, short selling, side project, Silicon Valley, Steve Ballmer, Steve Jobs, supply-chain management, telemarketer, The Predators' Ball, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, transcontinental railway, Upton Sinclair, War on Poverty, Works Progress Administration, Y2K, yellow journalism, zero-coupon bond

Up until the geniuses at ISS said it, nobody knew that Warren was really a witch.”10 When corporate board members were surveyed, they unanimously thought Buffett was their dream director. “We would come and wash Buffett’s car to have him on our board…. There’s not a person in the world who wouldn’t take himon their board…. CalPERS’s action shows the stupidity of corporate governance run amok…analogous to an NFL coach preferring an unknown quarterback from a Division II college instead of a Super Bowl quarterback…. If you were a shareholder, given the choice to have Warren Buffett on that board or not, you’d want him.”11 The Financial Times referred to ISS as the Darth Vader of corporate governance, citing a position that “smacked of dogma.”12 With inkwells of backlash spilling all over them, CalPERS and ISS began to look foolish, “somewhere between hideous and self-promoting populists,” as one retired CEO put it on the survey.

They called them the “owner-oriented principles.” No other management told its company’s owners these things. “Although our form is corporate, our attitude is partnership,” they wrote. “We do not view the company as the ultimate owner of our business assets, but, instead, view the company as a conduit through which our shareholders own the assets.”7 This statement—deceptively simple—amounted to a throwback to a former generation of corporate governance. The modern-day corporate chief viewed the shareholders as a nuisance, a noisy or quiet group to be appeased or ignored. They were certainly not his partners or his boss. We don’t play accounting games, Buffett and Munger said. We don’t like a lot of debt. We run the business to achieve the best long-term results. All of these sounded like simple truisms—except that so few managements could honestly make all of these statements.

But the idea of a board of directors overseeing Warren Buffett was ludicrous. A board made up of Barbie dolls would do just as well. When the Berkshire board met, it was to listen to Buffett teach, just as every occasion—from a party to a luncheon to a sing-along with Jim Clayton—turned into an opportunity for Buffett to figuratively stand at the blackboard, fingers dusty with chalk. The reason shareholders cared about Berkshire corporate governance was not oversight, however, but the question of who would succeed Buffett, who was now almost seventy-three. He had always said there was a “name in an envelope” crowning his successor. But he would not acquiesce to the pressure to reveal the name, because that would tie his hands to one person, and events could change. It would also effectively begin the transition, and he certainly wasn’t ready for that.


pages: 935 words: 267,358

Capital in the Twenty-First Century by Thomas Piketty

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accounting loophole / creative accounting, Asian financial crisis, banking crisis, banks create money, Berlin Wall, Branko Milanovic, British Empire, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, central bank independence, centre right, circulation of elites, collapse of Lehman Brothers, conceptual framework, corporate governance, correlation coefficient, David Ricardo: comparative advantage, demographic transition, distributed generation, diversification, diversified portfolio, European colonialism, eurozone crisis, Fall of the Berlin Wall, financial intermediation, full employment, German hyperinflation, Gini coefficient, high net worth, Honoré de Balzac, immigration reform, income inequality, income per capita, index card, inflation targeting, informal economy, invention of the steam engine, invisible hand, joint-stock company, Joseph Schumpeter, Kenneth Arrow, market bubble, means of production, mortgage debt, mortgage tax deduction, new economy, New Urbanism, offshore financial centre, open economy, Paul Samuelson, pension reform, purchasing power parity, race to the bottom, randomized controlled trial, refrigerator car, regulatory arbitrage, rent control, rent-seeking, Robert Gordon, Ronald Reagan, Simon Kuznets, sovereign wealth fund, Steve Jobs, The Nature of the Firm, the payments system, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, trade liberalization, very high income, Vilfredo Pareto, We are the 99%, zero-sum game

Indeed, one characteristic of today’s financial globalization is that every country is to a large extent owned by other countries, which not only distorts perceptions of the global distribution of wealth but also represents an important vulnerability for smaller countries as well as a source of instability in the global distribution of net positions. Broadly speaking, the 1970s and 1980s witnessed an extensive “financialization” of the global economy, which altered the structure of wealth in the sense that the total amount of financial assets and liabilities held by various sectors (households, corporations, government agencies) increased more rapidly than net wealth. In most countries, the total amount of financial assets and liabilities in the early 1970s did not exceed four to five years of national income. By 2010, this amount had increased to ten to fifteen years of national income (in the United States, Japan, Germany, and France in particular) and to twenty years of national income in Britain, which set an absolute historical record.28 This reflects the unprecedented development of cross-investments involving financial and nonfinancial corporations in the same country (and, in particular, a significant inflation of bank balance sheets, completely out of proportion with the growth of the banks’ own capital), as well as cross-investments between countries.

It may be excessive to accuse senior executives of having their “hands in the till,” but the metaphor is probably more apt than Adam Smith’s metaphor of the market’s “invisible hand.” In practice, the invisible hand does not exist, any more than “pure and perfect” competition does, and the market is always embodied in specific institutions such as corporate hierarchies and compensation committees. This does not mean that senior executives and compensation committees can set whatever salaries they please and always choose the highest possible figure. “Corporate governance” is subject to certain institutions and rules specific to each country. The rules are generally ambiguous and flawed, but there are certain checks and balances. Each society also imposes certain social norms, which affect the views of senior managers and stockholders (or their proxies, who are often institutional investors such as financial corporations and pension funds) as well as of the larger society.

By contrast, some people might think that a pay package of 1 million, 10 million, or even 50 million euros a year would be justified (uncertainty about individual marginal productivity being so large that no obvious limit is apparent). It is perfectly possible to imagine that the top centile’s share of total wages could reach 15–20 percent in the United States, or 25–30 percent, or even higher. The most convincing proof of the failure of corporate governance and of the absence of a rational productivity justification for extremely high executive pay is that when we collect data about individual firms (which we can do for publicly owned corporations in all the rich countries), it is very difficult to explain the observed variations in terms of firm performance. If we look at various performance indicators, such as sales growth, profits, and so on, we can break down the observed variance as a sum of other variances: variance due to causes external to the firm (such as the general state of the economy, raw material price shocks, variations in the exchange rate, average performance of other firms in the same sector, etc.) plus other “nonexternal” variances.


pages: 540 words: 168,921

The Relentless Revolution: A History of Capitalism by Joyce Appleby

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1919 Motor Transport Corps convoy, agricultural Revolution, anti-communist, Asian financial crisis, asset-backed security, Bartolomé de las Casas, Bernie Madoff, Bretton Woods, BRICs, British Empire, call centre, collateralized debt obligation, collective bargaining, Columbian Exchange, commoditize, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, deskilling, Doha Development Round, double entry bookkeeping, epigenetics, equal pay for equal work, European colonialism, facts on the ground, failed state, Firefox, fixed income, Ford paid five dollars a day, Francisco Pizarro, Frederick Winslow Taylor, full employment, Gordon Gekko, Henry Ford's grandson gave labor union leader Walter Reuther a tour of the company’s new, automated factory…, Hernando de Soto, hiring and firing, illegal immigration, informal economy, interchangeable parts, interest rate swap, invention of movable type, invention of the printing press, invention of the steam engine, invisible hand, Isaac Newton, James Hargreaves, James Watt: steam engine, Jeff Bezos, joint-stock company, Joseph Schumpeter, knowledge economy, land reform, Livingstone, I presume, Long Term Capital Management, Mahatma Gandhi, Martin Wolf, moral hazard, Parag Khanna, Ponzi scheme, profit maximization, profit motive, race to the bottom, Ralph Nader, refrigerator car, Ronald Reagan, Scramble for Africa, Silicon Valley, Silicon Valley startup, South China Sea, South Sea Bubble, special economic zone, spice trade, spinning jenny, strikebreaker, the built environment, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thorstein Veblen, total factor productivity, trade route, transatlantic slave trade, transatlantic slave trade, transcontinental railway, union organizing, Unsafe at Any Speed, Upton Sinclair, urban renewal, War on Poverty, working poor, Works Progress Administration, Yogi Berra, Yom Kippur War

Crafts, “The Golden Age of Economic Growth in Western Europe, 1950–1973,” Economic History Review, 48 (1995): 429–30; Angus Maddison, Dynamic Forces in Capitalist Development: A Long-Run Comparative View (Oxford, 1991), 164. 6. Diethelm Prowe, “Economic Democracy in Post–World War II Germany: Corporatist Crisis Response, 1945–1948,” Journal of Modern History, 57 (1985): 452–58. 7. Paul L. Davies, “A Note on Labour and Corporate Governance in the U.K.,” in Klaus J. Hopt et al, eds., Comparative Corporate Governance: The State of the Art and Emerging Research (Oxford, 1999), 373; Martin Wolf, “European Corporatism Must Embrace Change,” Financial Times, January 23, 2007. 8. Maddison, Dynamic Forces in Capitalist Development, 274–75; Frieden, Global Capitalism, 289. 9. John Gillingham, “The European Coal and Steel Community: An Object Lesson,” in Barry Eichengreen, ed., Europe’s Post-War Recovery (Cambridge, 1995), 152–53, 166. 10.

., Creating Modern Capitalism: How Entrepreneurs, Companies, and Countries Triumphed in Three Industrial Revolutions (Cambridge, 1995), 1. 6. Ronald Dore, William Lazonick, and Mary O’Sullivan, “Varieties of Capitalism in the Twentieth Century,” Oxford Review of Economic Policy, 15 (1999): 105; Randall K. Morck and Masao Nakamura, “A Frog in a Well Knows Nothing of the Ocean,” in Randall K. Morck, ed., A History of Corporate Governance around the World: Family Business Groups to Professional Managers, National Bureau of Economic Research Report (Chicago, 2007), 450–52. 7. Yutaka Kosai, “The Postwar Japanese Economy, 1945–1973,” in Yamamura, ed., Economic Emergence of Modern Japan. 8. Ibid., 138–39, 185. 9. Ian Buruma, “Who Freed Asia?,” Los Angeles Times, August 31, 2007; W. G. Beasley, Modern History of Japan, 2nd ed.


pages: 741 words: 179,454

Extreme Money: Masters of the Universe and the Cult of Risk by Satyajit Das

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affirmative action, Albert Einstein, algorithmic trading, Andy Kessler, Asian financial crisis, asset allocation, asset-backed security, bank run, banking crisis, banks create money, Basel III, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, capital asset pricing model, Carmen Reinhart, carried interest, Celtic Tiger, clean water, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, debt deflation, Deng Xiaoping, deskilling, discrete time, diversification, diversified portfolio, Doomsday Clock, Edward Thorp, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, financial independence, financial innovation, financial thriller, fixed income, full employment, global reserve currency, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, happiness index / gross national happiness, haute cuisine, high net worth, Hyman Minsky, index fund, information asymmetry, interest rate swap, invention of the wheel, invisible hand, Isaac Newton, job automation, Johann Wolfgang von Goethe, John Meriwether, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, labour market flexibility, laissez-faire capitalism, load shedding, locking in a profit, Long Term Capital Management, Louis Bachelier, margin call, market bubble, market fundamentalism, Marshall McLuhan, Martin Wolf, mega-rich, merger arbitrage, Mikhail Gorbachev, Milgram experiment, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, Naomi Klein, negative equity, Network effects, new economy, Nick Leeson, Nixon shock, Northern Rock, nuclear winter, oil shock, Own Your Own Home, Paul Samuelson, pets.com, Philip Mirowski, Plutocrats, plutocrats, Ponzi scheme, price anchoring, price stability, profit maximization, quantitative easing, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Ray Kurzweil, regulatory arbitrage, rent control, rent-seeking, reserve currency, Richard Feynman, Richard Feynman, Richard Thaler, Right to Buy, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, Robert Shiller, Rod Stewart played at Stephen Schwarzman birthday party, rolodex, Ronald Reagan, Ronald Reagan: Tear down this wall, Satyajit Das, savings glut, shareholder value, Sharpe ratio, short selling, Silicon Valley, six sigma, Slavoj Žižek, South Sea Bubble, special economic zone, statistical model, Stephen Hawking, Steve Jobs, survivorship bias, The Chicago School, The Great Moderation, the market place, the medium is the message, The Myth of the Rational Market, The Nature of the Firm, the new new thing, The Predators' Ball, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, trickle-down economics, Turing test, Upton Sinclair, value at risk, Yogi Berra, zero-coupon bond, zero-sum game

The collapse of the technology stock bubble and the events of September 11, 2001 paved the way for a new buyout boom. Corporate and accounting scandals such as Enron, Tyco, and Worldcom led to the 2002 U.S. Corporate and Auditing Accountability and Responsibility Act—the Sarbanes–Oxley Act or SOX, named after sponsors U.S. Senator Paul Sarbanes and U.S. Representative Michael G. Oxley. SOX established legislative standards of auditor independence, corporate governance, internal controls, and enhanced financial disclosure for U.S. public companies, backed by criminal penalties. Public company boards and managers became extremely cautious, retaining excess cash and setting high hurdle rates for investments, making them buyout targets. Public companies went private just to avoid SOX. In 2002, Alan Greenspan cut interest rates sharply to prevent the U.S. economy going into recession, reducing the cost of debt and increasing the ability to borrow to finance acquisitions.

A strong stock market and high prices for houses and other financial investments were now barometers of growth, wealth and economic health. Investors in China used the Shanghai Stock Market to measure China’s economic progress. Unrepresentative of China’s economy, the stocks traded were characterized by inadequate information, poor economic data and questionable accounting disclosure. Regulation and corporate governance was poor, with frequent government intervention. Trading was speculative, anticipating investment fashions, changes in liquidity and government intervention.29 Bill Miller, a famed fund manager, even saw the stock market as a substitute for the real economy: “Using the outlook for the economy to predict the direction of the stock market...is to look at things the wrong way round.”30 Over 50 percent of stock trading was now between super-fast super computers using mathematical algorithms.

Gillian Tett “Lunch with the FT: David Hare” (25 September 2009) Financial Times. 32. Jennifer Burns (2009) How Markets Fail: The Logic of Economic Calamities, Oxford University Press, Oxford: 177. 33. Warren Buffett, Berkshire Hathaway Letter to Shareholders (2009). 34. Louise Story “On Wall Street, bonuses, not profits, were real” (17 December 2008) New York Times. 35. Quoted in Robert A.G. Monks and Nell Minow (2008) Corporate Governance, John Wiley, Chichester: 311. 36. Lucian Bebchuk, Alma Cohen and Holger Spamann “Bankers had cashed in before the music stopped” (6 December 2009) Financial Times. 37. Quoted in Yves Smith (2010) ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism, Palgrave Macmillan, New York: 169. 38. Quoted in Duff McDonald “Please, Sir, I want some more: how Goldman Sachs is carving up its $11 billion money pie” (5 December 2005) New York Magazine. 39.


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Expected Returns: An Investor's Guide to Harvesting Market Rewards by Antti Ilmanen

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Andrei Shleifer, asset allocation, asset-backed security, availability heuristic, backtesting, balance sheet recession, bank run, banking crisis, barriers to entry, Bernie Madoff, Black Swan, Bretton Woods, buy low sell high, capital asset pricing model, capital controls, Carmen Reinhart, central bank independence, collateralized debt obligation, commoditize, commodity trading advisor, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, deglobalization, delta neutral, demand response, discounted cash flows, disintermediation, diversification, diversified portfolio, dividend-yielding stocks, equity premium, Eugene Fama: efficient market hypothesis, fiat currency, financial deregulation, financial innovation, financial intermediation, fixed income, Flash crash, framing effect, frictionless, frictionless market, George Akerlof, global reserve currency, Google Earth, high net worth, hindsight bias, Hyman Minsky, implied volatility, income inequality, incomplete markets, index fund, inflation targeting, information asymmetry, interest rate swap, invisible hand, Kenneth Rogoff, laissez-faire capitalism, law of one price, Long Term Capital Management, loss aversion, margin call, market bubble, market clearing, market friction, market fundamentalism, market microstructure, mental accounting, merger arbitrage, mittelstand, moral hazard, Myron Scholes, negative equity, New Journalism, oil shock, p-value, passive investing, Paul Samuelson, performance metric, Ponzi scheme, prediction markets, price anchoring, price stability, principal–agent problem, private sector deleveraging, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, reserve currency, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, riskless arbitrage, Robert Shiller, Robert Shiller, savings glut, selection bias, Sharpe ratio, short selling, sovereign wealth fund, statistical arbitrage, statistical model, stochastic volatility, survivorship bias, systematic trading, The Great Moderation, The Myth of the Rational Market, too big to fail, transaction costs, tulip mania, value at risk, volatility arbitrage, volatility smile, working-age population, Y2K, yield curve, zero-coupon bond, zero-sum game

It includes infrastructure, timber, and farmland; art and other collectibles (fine wines, rare coins, stamps); and more novel securities such as catastrophe bonds, carbon credits, intellectual property rights, viatical or life insurance settlements, longevity swaps, and others. If hedge funds can be characterized as an asset class, then the list of alternatives may be extended to include managed futures (typically momentum-oriented commodity-trading advisors or CTAs), global tactical asset allocation managers (typically value-oriented investors), active FX, volatility trading, alternative betas and hedge fund replication, as well as investments focused on corporate governance, sustainable development, and shareholder activism. Figure 11.1 shows the cumulative returns of the big-four alternatives since 1984. Note that historical returns on actively managed asset classes (HF, PE) may be misleading because of survivorship and other reporting biases that can overstate actual returns. Moreover, standard risk adjustments don’t capture all risks to which these active strategies are exposed.

Investor inflows into PE funds (following well-known success by Yale University and some other pioneers) and apparently attractive investment opportunities and cheap debt financing made 2003–2007 very strong years for the sector. U.S.-centric activity expanded fast to Europe and to the rest of the world. The year before mid-2007 has been hailed as the golden age—one that inevitably led to excesses and a hard landing in 2008. The main advantage of private equity over public markets is in better corporate governance, including closer supervision of management. PE funds can create wealth by improving operating efficiency and exploiting tax deductibility of interest payments through leverage—thus PE is not subject to the zero-sum-game argument of most active managers. Yet, PE also involves risks. PE and VC funds have especially high equity market betas if artificially smoothed returns are adjusted for, so they offer less diversification to an equity-dominated portfolio than do other alternatives.

Longstaff; and Ravit Mandell (2006), “The market price of risk in interest rate swaps: The roles of default and liquidity risks,” Journal of Business 79(5), 2337–2360. Ljungqvist, Alexander; and Matthew P. Richardson (2003), “The investment behavior of private equity fund managers,” New York University Stern School of Business working paper 03-29. Ljungqvist, Alexander; Matthew P. Richardson; and Daniel Wolfenzon (2007), “The investment behavior of buyout funds: Theory and evidence,” European Corporate Governance Institute working paper. Lo, Andrew W. (2004), “The adaptive markets hypothesis: Market efficiency from an evolutionary perspective,” Journal of Portfolio Management 30, 15–29. Lo, Andrew W. (2008), Hedge Funds: An Analytic Perspective, Princeton, NJ: Princeton University Press. Longstaff, Francis A. (2004), “The flight to liquidity premium in U.S. Treasury bond prices,” Journal of Business 77, 511–526.


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