corporate governance

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pages: 98 words: 27,201

Are Chief Executives Overpaid? by Deborah Hargreaves

banking crisis, Big bang: deregulation of the City of London, bonus culture, business climate, corporate governance, Donald Trump, G4S, Jeff Bezos, loadsamoney, Mark Zuckerberg, Martin Wolf, performance metric, principal–agent problem, profit maximization, Ronald Reagan, shareholder value, Snapchat, trade liberalization, trickle-down economics, wealth creators

Governments in recent times have tended to steer clear of too much regulation of big business, and most of the rules applying to the way companies are run are loosely bracketed under the term ‘corporate governance’. Corporate governance in the UK is non-binding, but applied on a ‘comply or explain’ basis, which means that you follow the guidelines and if you don’t, you explain to your shareholders why not. In the US, the rules are more legalistic, but there are fewer of them and shareholders advise companies on governance standards. A corporate scandal will often prompt a kneejerk reaction by ministers – in the UK this takes the form of a corporate governance review by a member of the business elite, introducing a revised set of guidelines. This has happened many times since the initial UK corporate governance code was developed after a review by Sir Adrian Cadbury in 1992. In the US, there is generally a legal reaction such as the Sarbanes-Oxley Act, introduced after the Enron debacle.

The onus would then be on the new institutions to establish some clear guidelines that could be enforced and entrenched without relying on the whim of shareholders. A new emphasis on corporate governance would start to shift the business community towards a more inclusive focus. If we are to achieve a new sort of capitalism, we need to turn our companies from short-term profit-making machines for shareholders into long-term investors in the skills and wages of the workforce, the sustainability of the environment, as well as longer-term returns for investors. Pushing for pay reform There is no shortage of calls for pay reform and corporate governance changes, but most proposals involve tweaking the existing system rather than overhauling it. In the UK, MPs called for a more inclusive approach in their report on corporate governance in March 2017, where they stressed that they were trying to ensure the better enforcement of the 2006 Companies Act: ‘to improve the voice of other stakeholders, including employees, and to require companies to engage in a more open and transparent manner with the public.’

In the most high-profile protest about corporate excess, unions dragged a pig named Cedric and a trough to the British Gas annual shareholders’ meeting in 1994 to protest about a 75 per cent pay rise for chief executive Cedric Brown. His package was – by today’s standards – a modest £475,000, but the company was newly-privatized and making staff redundant, and it had generated a lot of public anger. A classic response to public anger in the UK was to commission a corporate governance review of company practices by a member of the great and the good. These followed hot on the heels of each other in the 1990s, starting with Sir Adrian Cadbury in 1992. The problem with these corporate governance reforms was that they tried to establish best practice and were not binding. Also, they shied away from anything radical, not surprisingly given that they were usually run by a corporate heavyweight who did not want to rock the boat. The late Sir Richard Greenbury, former chair of Marks & Spencer, who ran an inquiry into executive pay in 1995, said it was the worst year of his life.


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

activist fund / activist shareholder / activist investor, Admiral Zheng, banking crisis, Basel III, Bernie Madoff, Black Swan, buy and hold, 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, Kickstarter, light touch regulation, London Whale, Long Term Capital Management, moral hazard, Myron Scholes, Northern Rock, passive investing, performance metric, Ponzi scheme, post-work, 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

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, buy and hold, 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.


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 cycle, business process, buy and hold, 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, disruptive innovation, 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, 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, Social Responsibility of Business Is to Increase Its Profits, 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.


file:///C:/Documents%20and%... by vpavan

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, asset allocation, Berlin Wall, business cycle, buttonwood tree, buy and hold, corporate governance, corporate raider, disintermediation, diversification, diversified portfolio, Donald Trump, estate planning, fixed income, index fund, intangible asset, interest rate swap, margin call, money market fund, Myron Scholes, new economy, price discovery process, profit motive, risk tolerance, shareholder value, short selling, Silicon Valley, Small Order Execution System, Steve Jobs, stocks for the long run, stocks for the long term, technology bubble, transaction costs, Vanguard fund, women in the workforce, zero-coupon bond, éminence grise

A GOOD BOARD: TRANSPARENCY IS PART OF THE CULTURE AT PFIZER If you're looking for an example of a company practicing good corporate governance, consider Pfizer Corp., a pharmaceutical company that has really pushed the envelope. In 1992, Pfizer became the first company to name a vice-president for corporate governance, and today remains one of the few companies with such a position. It also has a corporate governance committee, in addition to the standard audit, compensation, and executive committees. And its proxy statement lists the company's corporate governance principles. Companies don't have to do this, says Peggy Foran, the company's current vice-president for corporate governance. "But Pfizer makes an extra effort to be open, in the belief that it leads to better investor relations," she says. The job of the corporate governance committee, according to Pfizer's 2001 proxy statement, is to "make recommendations to the board concerning the appropriate size and needs of the board."

But as activist shareholder groups and the financial media frown on this practice as a management-protection ploy, companies increasingly are putting individual directors up for annual reelection by shareholders. Why Should You Care? I believe a company's corporate governance is one of the most important factors to consider before investing in a company. Put simply, corporate governance is the relationship between the investor, the management team, and the board of directors of a company. Each of these groups has different rights and responsibilities. When the three groups are able to communicate openly and independently, we can say that a company is exhibiting good corporate governance. This does not mean that the board second-guesses every decision made by the top executives of a company. Rather, a board should provide careful oversight of a company's activities, drawing on its members' expertise in areas such as marketing, finance, or technology.

At a time when strict enforcement and tighter rules are needed, the exchanges must resist giving a free pass to companies whose corporate governance fails to meet minimum standards. In response to the crisis of confidence spawned by the Enron/Arthur Andersen debacle and many other corporate meltdowns due to accounting irregularities, the exchanges in mid-2002, to their credit, put out for comment new rules that far exceed anything done before. Now that my SEC term is over, I've been asked to sit on several boards. I currently serve as a director at Bloomberg L.P.; M & T Bank of Buffalo, N.Y.; fund management company Neuberger Berman; and U.S. Investigation Services. I take my corporate governance duties seriously. How Do I Find Out Whether a Company Has Good Corporate Governance? You, too, should care deeply about the governance of the companies in which you invest.


pages: 443 words: 51,804

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

algorithmic trading, asset allocation, automated trading system, backtesting, Black-Scholes formula, Brownian motion, business process, buy and hold, 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.


Global Governance and Financial Crises by Meghnad Desai, Yahia Said

Asian financial crisis, bank run, banking crisis, Bretton Woods, business cycle, 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.

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.

Such elimination of otherwise viable enterprises would most certainly undermine the processes of capacity and capability building deemed essential for accelerated development or catching up.17 Crises, recovery and reforms in East Asia 103 In light of the bases for and nature of the recent recovery, the earlier and ongoing emphasis on the urgency of corporate reform was clearly ill informed and ill advised. Corporate profitability has undoubtedly improved. But there is no clear evidence that corporate governance reform was key to bringing about the recoveries in the region. In fact, many corporate governance reform measures are only intended to prevent future crises, and the priority given to them is often at the expense of short-term economic recovery. With their earlier predictions of imminent ‘doom without corporate governance reform’ not realised, those insisting on such reforms as pre-requisites for recovery have now switched to warning of a second downturn for countries like Malaysia where resistance to such reform has been more explicit and officially articulated.


Mastering Private Equity by Zeisberger, Claudia,Prahl, Michael,White, Bowen, Michael Prahl, Bowen White

asset allocation, backtesting, barriers to entry, Basel III, business process, buy low sell high, capital controls, carried interest, commoditize, corporate governance, corporate raider, correlation coefficient, creative destruction, discounted cash flows, disintermediation, disruptive innovation, distributed generation, diversification, diversified portfolio, family office, fixed income, high net worth, information asymmetry, intangible asset, Lean Startup, market clearing, passive investing, pattern recognition, performance metric, price mechanism, profit maximization, risk tolerance, risk-adjusted returns, risk/return, shareholder value, Sharpe ratio, Silicon Valley, sovereign wealth fund, statistical arbitrage, time value of money, transaction costs

It allows PE firms to return capital to its investors and raise follow-on funds successfully. This chapter details the key considerations that drive the exit process and explains the main exit strategies employed by PE funds, stepping through the process and discussing motivations of the various parties involved. 11 CORPORATE GOVERNANCE Corporate governance in private equity (PE) refers to the practices, processes and rules put in place to align the interests of owners, investors and management. A sound corporate governance framework is crucial to oversee and coordinate activities at a funds’ investee companies. Governance effectively decentralizes decision-making, identifies appropriate performance measures and reward systems, and implements effective tools to monitor performance; it is a fundamental part of PE’s formula for success.

Notes 1 Please refer to Chapter 9 Deal Structuring for a description of the common instruments used to fund a PE transaction. 2 Please refer to Chapter 8 Deal Pricing Dynamics for a description of “locked-box” and “completion accounts” mechanisms. 3 Please refer to Chapter 9 Deal Structuring for a description of the lead arranger and other bank roles in an LBO. 4 Please refer to Chapter 9 Deal Structuring for a description of the costs and other characteristics of different types of debt. 5 Please refer to Chapter 9 Deal Structuring for information on the various covenants that apply to different types of debt. 6 Readers interested in specific terms governing VC investments should refer to Chapter 2 Venture Capital for a discussion on term sheets, and those more interested in minority shareholding rights in a growth equity deal should refer to Chapter 3 Growth Equity. 7 Please refer to Chapter 12 Securing Management Teams for further details and examples of management incentive schemes. 8 Please refer to Chapter 11 Corporate Governance for additional details on the composition and role of boards in a buyout and minority setting. SECTION III MANAGING PE INVESTMENTS The third section of our book covers the post-investment period during which value is created and ultimately realized upon exit. This may be the most crucial phase of the investment process, when the ability to execute well-laid plans will ensure a positive return on investment and when a private equity (PE) firm will need to contend with risks and opportunities not identified during the due diligence. As PE professionals say: “any fool can make an investment; it is what you do afterwards that counts.” The foundation of the post-investment phase is a solid corporate governance model implemented by the PE investor, which begins with clear monitoring mechanisms to keep all stakeholders informed and to fulfill the firm’s fiduciary duty towards its limited partners (LPs).

High-profile public market offerings obscure the fact that the vast majority of PE exits are made through a sale to either strategic buyers or, increasingly, other financial buyers. Yet no matter what exit route is chosen, only a successful sale validates the investment thesis, enables the fund to show strong returns and allows the PE firm to restart the cycle of fundraising. Section Overview The chapters in this section will walk the reader through the post-investment period all the way to the point of exit. CHAPTER 11. CORPORATE GOVERNANCE: The key features of PE corporate governance—a sense of urgency, active ownership and an alignment of interests with portfolio company management—are vital ingredients on the way to a successful exit. We discuss the role of portfolio company boards in both minority and majority investments. CHAPTER 12. SECURING MANAGEMENT TEAMS: PE firms work closely with the management teams in their portfolio companies. It is therefore critical to ensure that their interests are aligned with that of the PE investor, a target that is achieved through shared equity ownership.


pages: 339 words: 109,331

The Clash of the Cultures by John C. Bogle

asset allocation, buy and hold, 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, post-work, 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: 408 words: 108,985

Rewriting the Rules of the European Economy: An Agenda for Growth and Shared Prosperity by Joseph E. Stiglitz

Airbnb, balance sheet recession, bank run, banking crisis, barriers to entry, Basel III, basic income, Berlin Wall, bilateral investment treaty, business cycle, business process, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collapse of Lehman Brothers, collective bargaining, corporate governance, corporate raider, corporate social responsibility, creative destruction, credit crunch, deindustrialization, discovery of DNA, diversified portfolio, Donald Trump, eurozone crisis, Fall of the Berlin Wall, financial intermediation, Francis Fukuyama: the end of history, full employment, gender pay gap, George Akerlof, gig economy, Gini coefficient, hiring and firing, housing crisis, Hyman Minsky, income inequality, inflation targeting, informal economy, information asymmetry, intangible asset, investor state dispute settlement, invisible hand, Isaac Newton, labor-force participation, liberal capitalism, low skilled workers, market fundamentalism, mini-job, moral hazard, non-tariff barriers, offshore financial centre, open economy, patent troll, pension reform, price mechanism, price stability, purchasing power parity, quantitative easing, race to the bottom, regulatory arbitrage, rent-seeking, Robert Shiller, Robert Shiller, Ronald Reagan, selection bias, shareholder value, Silicon Valley, sovereign wealth fund, TaskRabbit, too big to fail, trade liberalization, transaction costs, transfer pricing, trickle-down economics, tulip mania, universal basic income, unorthodox policies, zero-sum game

Firms today are far different from the simplistic textbook models in which an entrepreneur owns a firm and makes decisions to maximize long-run profits. Large and influential corporations today have large numbers of shareholders, and there is a separation of ownership and control. Control is in the hands of a CEO and a coterie of managers. Getting this group to act in ways that maximize societal welfare, or even the wealth of shareholders, is the central problem of corporate governance, the rules and regulations pertaining to how firms are run. Corporate governance is concerned with what the objectives of the firm should be and whose voices should be heard during decision-making processes. These considerations, in turn, affect the incentive structures of executives. Chapter 5 shows how this particular issue played out in the financial sector. The 2008 crisis exposed its perverse incentive structures, which served the interests of the bankers but not the banks’ shareholders, bondholders, or customers, let alone those of the broader society.

Changes in economic structure and technology have combined with innovations in the creation and maintenance of market power to create a landscape full of significant threats to competition. What enables a market economy to serve society is competition. European governments, and in particular the EU, must be as innovative as the private sector in combating market power, and as committed to limiting it as the private sector is to enhancing it. CORPORATE GOVERNANCE For decades, Europe has debated best-practices for corporate governance. Should European firms simply maximize the value of the firm to their shareholders or should they take into account the (often diverging) interests of other stakeholders? Even within shareholder capitalism (as the first perspective is often referred to) there is a debate: Should the focus be on today’s stock market value or on longer-term value? In practice, shareholder capitalism in the United States has led to short-termism.

See also competitive markets critical components summarized, 139 managerial incentive systems, 140–43 the right mix of decision-makers, 139–40 rules for decision-making, 139 compulsory licenses, 148 Consumer Prices, Harmonised Index of (HICP), 64 convergence criteria, 33–35 cooperative ownership, 270 cooperatives and local banking institutions, 184–86 core inflation metrics, 82 corporate governance central problem of, 127–28 CEOs and executives, 137–38, 140–43 long- vs. short-term gains, 136 stakeholder capitalism and, 136–37 corporate taxation investment and, 194–95 lower tax rates and, 191–92 moving toward resolution, 198–99 tax avoidance and evasion, 195–97 tax competition, 192–94, 195 transfer pricing and, 198 corporations and businesses. See also corporate governance; corporate taxation; small- and medium-sized enterprises CEO and executives of, 137–38, 1400–143 globalization benefitting, 288–89, 304 intellectual property rights benefitting, 325–26 markets of (see market economies; market power) organizational forms of, 141–43 tax reformation of, 318–20 trade regulations impacting, 317–18 trade talk privileges of, 314 credit card companies, 133 credit issues credit availability (see loans and lending) credit rating agencies, 171 German practices causing, 46 internal devaluation impacting, 42 macro-prudential regulations and, 92–93 crisis countries analysis of, 68 austerity impacting, 37 divergent issues of, 48–49 ineffective EU policies in, 60–61 internal devaluation and, 41–44 single currency system impacting, 39, 54 cross-border externalities, 307–8 deadly sovereign-bank embrace, 176 debt Debt Doctrine, 17–18 debt-to-GDP ratio, 78–79 limiting (see Stability and Growth Pact) mutualization of, 55–57 restructuring of, 57–58 2008 crisis impacting, 35 Debt Doctrine, 17–18 decentralized bargaining, 263 deficits.


pages: 586 words: 159,901

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

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, business cycle, 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: 756 words: 120,818

The Levelling: What’s Next After Globalization by Michael O’sullivan

"Robert Solow", 3D printing, Airbnb, algorithmic trading, bank run, banking crisis, barriers to entry, Bernie Sanders, bitcoin, Black Swan, blockchain, Boris Johnson, Branko Milanovic, Bretton Woods, British Empire, business cycle, business process, capital controls, Celtic Tiger, central bank independence, cloud computing, continuation of politics by other means, corporate governance, credit crunch, cryptocurrency, deglobalization, deindustrialization, disruptive innovation, distributed ledger, Donald Trump, eurozone crisis, financial innovation, first-past-the-post, fixed income, Geoffrey West, Santa Fe Institute, Gini coefficient, global value chain, housing crisis, income inequality, Intergovernmental Panel on Climate Change (IPCC), knowledge economy, liberal world order, Long Term Capital Management, longitudinal study, market bubble, minimum wage unemployment, new economy, Northern Rock, offshore financial centre, open economy, pattern recognition, Peace of Westphalia, performance metric, private military company, quantitative easing, race to the bottom, reserve currency, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, Scramble for Africa, secular stagnation, Silicon Valley, Sinatra Doctrine, South China Sea, South Sea Bubble, special drawing rights, supply-chain management, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, total factor productivity, trade liberalization, tulip mania, Valery Gerasimov, Washington Consensus

Baird, “BOJ Chief Faces Tougher Second Term as Reality of Monetary Easing Program Sinks In,” Japan Times, March 5, 2018, https://www.japantimes.co.jp/news/2018/03/05/business/economy-business/boj-chief-faces-tougher-second-term-reality-easing-program-sinks/#.Wp7F2_nyubh. 36. The OECD has done excellent work in trying to develop rigorous global governance standards. See their corporate governance statement at http://www.oecd.org/corporate/. 37. Eisinger, The Chickenshit Club. 38. B. McLean and P. Elkind, The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron (Penguin Books, 2003). 39. Committee on the Financial Aspects of Corporate Governance, “The Financial Aspects of Corporate Governance,” December 1, 1992, https://www.icaew.com/-/media/corporate/files/library/subjects/corporate-governance/financial-aspects-of-corporate-governance.ashx?la=en. 40. “The Agreement of the People,” October 28, 1647, Constitution Society, http://www.constitution.org/eng/conpur074.htm. 41. OECD, Toolkit for Risk Governance, https://www.oecd.org/governance/toolkit-on-risk-governance/home/.

This would simply unleash other risks, with unpredictable consequences for the yen, consumer behavior, and Japan’s corporations.35 A Japanese debt restructuring, however, may finally provoke changes to the cross-holding system across corporations and might potentially see the introduction of a more international corporate governance system. This is one of the key fault lines in the distinction between a truly globalized world and a multipolar one. In a multipolar world, different corporate governance systems would prevail and grow, allowing weaker, more permissive systems to spread like weeds. The ultimate outcome would be to raise the cost of capital in a world where capital can flow freely, to leave investors (in some cases) at the mercy of the arbitrariness of governments, dominant shareholders, and corporate management. In the context of financial markets, corporate governance does not matter much, most of the time. Companies with poor governance characteristics can outperform those with good governance for extended periods of time.

If more companies and regulators internationally were to adopt rigorous global governance standards, it would create a layer of global corporate actors with global governance standards and in this sense would challenge the notion that the corporate world also needs to be divided on a multipolar basis.36 My expectation that this can happen is low. Recent experiments with broad corporate governance reforms have failed. In Japan, for example, one of the tenets of “Abenomics”—after Japanese prime minister Shinzō Abe—was the intention to make Japanese companies less complicated and somewhat more Western (e.g., by returning capital to shareholders), the ultimate aim being to improve the return on equity of Japanese companies. This has not materialized, and the follow-through in corporate governance change has been weak. Equally, in the United States, there is no formal corporate governance code, which is why more aggressive governance mechanisms—takeovers and publicly pugnacious shareholder activism, for example—tend to be more prevalent.


pages: 261 words: 103,244

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

"Robert Solow", accounting loophole / creative accounting, Affordable Care Act / Obamacare, Albert Einstein, asset allocation, bank run, barriers to entry, Basel III, Bernie Madoff, British Empire, buy and hold, 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, 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: 255 words: 76,495

The Facebook era: tapping online social networks to build better products, reach new audiences, and sell more stuff by Clara Shih

business process, call centre, Clayton Christensen, cloud computing, commoditize, conceptual framework, corporate governance, crowdsourcing, glass ceiling, jimmy wales, Mark Zuckerberg, Metcalfe’s law, Network effects, pets.com, pre–internet, rolodex, semantic web, sentiment analysis, Silicon Valley, Silicon Valley startup, social graph, social web, software as a service, Tony Hsieh, web application

See also employees advice for, 141 keeping contact with recruiters, 137 alumni networks, 139-140 financial services example, 138-139 nonplacements, 138 successful placements, 137 poaching, 141-142 recruiting, 123-124 advice for job candidates, 141 candidate references, obtaining, 134-135 credibility of recruiter, establishing, 136 employer reputation, marketing, 136 keeping contact with candidates, 137-139 in Second Life, 22 social networking sites for, 124-126 sourcing candidates, 126-134 references, obtaining, 134-135 sourcing, 126-127 active candidates, 127-128 college students, 129-131 passive candidates, 128-129 by “reading between the lines,” 133-134 referrals, 131-132 from specialized networks, 132-133 case studies Aster Data Systems (sales prospecting), 66 Bloomingdale’s (World Wide Web), 16-17 Bonobos (hypertargeting), 88 Dow Chemical Company (corporate alumni networks), 140 Jack in the Box (brand presence on MySpace), 91-92 JPMorgan (PCs), 14-15 From the Library of Kerri Ross co r p o ra te g ove r n a n ce Mutual of Omaha Insurance Company (mainframe computing), 13 MyStarbucksIdea for Facebook (social filtering), 32-34 Victoria’s Secret (brand presence on Facebook), 93 Causes, 38-39 Christensen, Clayton, 204 Classmates.com, 221 clique networks, 79 entrepreneurial networks versus, 49-50 closed networks, open networks versus, 196 collaboration among organizations, 209-210 cross-boundary collaboration, 196-197 in prototyping, 115-116 within sales team, 72-73 college students as initial Facebook population, 35 recruiting, 129-131 Comcast, 105-106 comments, 190 commercial implementation of innovation, 117 external buy-in, winning, 118-119 internal buy-in, winning, 117 communication with digital media, 26-29 behavioral targeting, 28-29 content aggregation, 27 search engine marketing, 27-28 Web site communities, 27 flattened hierarchy, 52 interaction modes, 46-47 building social capital, 188-192 communities official communities, establishing, 157-159 offline communities, strengthening, 208 on social networking sites brand loyalty/engagement and, 89-94 Jack in the Box case study, 91-92 Victoria’s Secret case study, 93 unofficial communities, corporate presence on, 161 unsanctioned communities corporate participation in, 153-155 finding, 148-155 listening to conversations, 150-153 company policies, updating, 201 225 compliance. See corporate governance concept generation, 108 crowdsourcing ideation, 111-112 finding expertise, 113-115 from meme feeds, 108-110 confidentiality issues, 199-200 Connectbeam, 114-115 connectors (in social epidemics), 100 contact databases, social networking sites as, 45-46 contacts. See also friends blocking, 49 de-friending, 49 content aggregation, 27 continual iteration in innovation, 120 changing customers into partners, 121 crowdsourcing feedback, 120 with polls, 120 conversations in unsanctioned communities, listening to, 150-153 corporate alumni networks, 139-140 corporate governance, 195-196 cross-boundary collaboration, 196-197 industry standards and portability, 197-198 input from legal, IT, and PR departments, 200-202 From the Library of Kerri Ross 226 co r p o ra te g ove r n a n ce open networks versus closed networks, 196 risk management, 198-200 brand misrepresentation, 200 identity, privacy, security, 198-199 intellectual property, confidentiality, 199-200 user adoption levels of social networking, 197 corporate IT, social future of, 206-207 corporate participation in unsanctioned communities, 153-155 corporate presence establishing on social networking sites, 155-157, 160-161 selecting social networking sites for, 156 in unofficial communities, 161 cost-effectiveness of hypertargeting, 86-87 CPC ad pricing model, 171 CPM ad pricing model, 171 credibility, establishing, 64-65 CRM (customer relationship management), 61 social networking sites versus, 80 cross-boundary collaboration, 196-197 crowdsourcing, 77-78 crowdsourcing feedback, 120 crowdsourcing ideation, 111-112 customer engagement, 145146.

5 Social Network Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .79 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .80 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .81 Hypertargeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .82 Loyalty and Engagement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .89 Social Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .96 Challenges and Limitations 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .103 Social Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .107 Concept Generation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .108 Prototyping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .115 Commercial Implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .117 Continual Iteration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .120 7 Social Recruiting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .123 The Best Social Networks for Recruiting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .124 Sourcing Candidates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .126 Candidate References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .134 Employer and Recruiter Reputation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .135 Keeping in Touch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .137 Advice for Candidates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .141 How to Protect Against Employee Poaching Part III: . . . . . . . . . . . . . . . . . . . . . . . . . . . . .141 Your Step-By-Step Guide to Using Facebook for Business 8 Engage Your Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .145 Start with Clear Strategy and Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .146 Find Your Unsanctioned Communities Define and Establish Your Presence 9 Get Your Message Across . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .148 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .155 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .163 Hypersegment Your Audience . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .164 Choose Your Media Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .167 From the Library of Kerri Ross viii Th e Fa ce b o o k E ra 10 Build and Manage Your Relationships Setting Up Your Facebook Account . . . . . . . . . . . . . . . . . . . . . . . . . . .181 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .181 Interacting on Facebook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .187 Asking for and Providing Introductions 11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .193 Corporate Governance and Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . .195 Choosing the Right Network Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .196 Identify Key Risk Areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .198 Partner with Legal, IT, and PR 12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .200 The Future of Social Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .203 The Innovator’s Dilemma The ROI of Social Social Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .204 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .205 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .205 What the Future Means for Doing Business Final Remarks A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .206 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .211 Snapshot of Top Social Networking Sites, March 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .213 Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .223 From the Library of Kerri Ross Fo re wo rd ix Foreword Ten years ago, I was an executive at a traditional enterprise software company.

. • Chapter 10,“Build and Manage Your Relationships,” details how individuals set up a social networking account and provides tips for creating effective profiles, establishing friend connections, organizing contacts, and managing different identities across one’s personal and professional contacts. It also talks about etiquette for initiating or accepting friend requests, using online networking in conjunction with offline networking, providing or requesting introductions, and other interactions. Most of the examples from this chapter are from Facebook but can be generally applied to other social networking services. • Chapter 11,“Corporate Governance and Strategy,” speaks to the challenges, obstacles, and realities of implementing social networking technologies in a corporate setting. Specifically, this chapter urges businesses to consider the risks around privacy, security, intellectual property, confidentiality, and brand misrepresentation, and the importance of partnering closely with legal and IT departments to put the right systems and policies in place to mitigate these risks. • Chapter 12,“The Future of Social Business,” likens the status quo of online social networking to where we were with the Internet in the late ‘80s.


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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

Branko Milanovic, business cycle, 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, 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.


pages: 290 words: 83,248

The Greed Merchants: How the Investment Banks Exploited the System by Philip Augar

Andy Kessler, barriers to entry, Berlin Wall, Big bang: deregulation of the City of London, Bonfire of the Vanities, business cycle, buttonwood tree, buy and hold, capital asset pricing model, commoditize, corporate governance, corporate raider, crony capitalism, cross-subsidies, financial deregulation, financial innovation, fixed income, Gordon Gekko, high net worth, information retrieval, interest rate derivative, invisible hand, John Meriwether, Long Term Capital Management, Martin Wolf, new economy, Nick Leeson, offshore financial centre, pensions crisis, regulatory arbitrage, Sand Hill Road, shareholder value, short selling, Silicon Valley, South Sea Bubble, statistical model, Telecommunications Act of 1996, The Chicago School, The Predators' Ball, The Wealth of Nations by Adam Smith, transaction costs, tulip mania, value at risk, yield curve

A combination of litigation and regulation produced a change in the corporate governance environment in America. Even the deregulation-inclined Bush administration was forced into action, publishing more pages of rules and regulations in 2002 than any previous administration in any previous year, much of it to do with the Sarbanes-Oxley Act passed by Congress in July that year.1 Change focused on two key areas: auditing and corporate governance. The establishment of the Public Company Accounting Oversight Board and more stringent regulation have helped to re-establish auditing as a ‘guardian at the gate’ profession.2 The role and responsibilities of boards have also been redefined, with the intention of improving corporate governance. Gene O’Kelly, chairman and CEO of KPMG LLP, believes that as a result of Sarbanes-Oxley, directors are taking their responsibilities more seriously while ‘The law’s effect on management behaviour is equally striking.

Their role is described with reassuring words like ‘monitoring excessive concentration’, ‘measurement, management and analysis of risk profile’ and ‘responsible risk management’ in the annual reports and detailed financial filings made on Form 10-K (10Ks). Intelligent, responsible risk management is essential to the success of a modern investment bank and the existence of a comprehensive system of communication and committees shows shareholders that good corporate governance is in place. But good corporate governance cuts both ways: risk management means capturing profit as well as protecting against loss. The descriptions of these committees make it very clear that the investment banks are joining up the dots. Morgan Stanley manages trading risk ‘on a Company-wide basis, on a worldwide trading division level, and on an individual product basis’.7 Bear Stearns described ‘constant communication between trading department management and senior management concerning inventory positions and market risk profile’, including ‘formal reports of positions, profits and losses and certain trading strategies’ to a committee ‘which comprises senior managing directors from each trading department as well as the Risk Management Department’.8 A committee at Lehman Brothers that includes the key business heads ‘meets weekly and reviews all risk exposures, position concentrations and risk taking activities’.

In the USA, despite the recent introduction of more stringent rules, the independence of boards of directors from executive management varies. The chairman and the CEO is frequently the same person and the other directors, although ‘independent’ in the regulatory definition of the word, are often non-executives drawn from the CEO’s peer group. In the UK, executive boards are bigger and corporate governance gives non-executive directors more power and responsibility, but they too are usually drawn from a small group of connected people. Boardrooms in America and Britain are therefore full of people who in the corporate governance environment of the nineties were more likely to go along with the CEO’s plan than to recommend alternative development strategies. In the absence of restraint at board level, the shareholders were the obvious people to apply the brakes. Their support is needed in major deals, but they rarely voted against management.


pages: 515 words: 132,295

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

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, business cycle, buy and hold, 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, Kickstarter, knowledge economy, labor-force participation, 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, Social Responsibility of Business Is to Increase Its Profits, 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.


pages: 192

Kicking Awaythe Ladder by Ha-Joon Chang

Asian financial crisis, business cycle, central bank independence, clean water, colonial rule, Corn Laws, corporate governance, creative destruction, David Ricardo: comparative advantage, fear of failure, income inequality, income per capita, joint-stock company, joint-stock limited liability company, land reform, liberal world order, moral hazard, open economy, purchasing power parity, rent-seeking, short selling, Simon Kuznets, The Wealth of Nations by Adam Smith, trade liberalization, Washington Consensus

In Spain, scrutiny of accounts by independent auditors was not made mandatory until as late as 198 8.80 D. Competition law Contrary to what is assumed in much current literature on the subject, corporate governance is not simply a matter internal to the corporation in question. Actions by very large firms with significant market power can have consequences for the whole economy (e.g., their bankruptcy can create financial panic) or undermine the basis of the market economy itself (for example, through the socially harmful exploitation of a monopoly position). In this context, corporate governance becomes a matter for society as a whole, not just for the particular company's shareholders. Corporate governance in this sense does not simply involve company-level laws, for example, those specifying the duties of the board of directors to the shareholders.

They include restrictive macroeconomic policy, liberalization of international trade and investment, privatization and deregulation.2 The 'good institutions' are essentially those that are to be found in developed countries, especially the Anglo-American onesl The key institutions include: democracy; 'good' bureaucracy; an independent judiciary; strongly protected private property rights (including intellectual property rights); and transparent and market-oriented corporate governance and financial institutions (including a politically independent central bank). As we shall see later in the book, there have been heated debates on whether or not these recommended policies and institutions are in fact appropriate for today's developing countries. Curiously, however, many of those critics who question the applicability of these recommendations nevertheless take it for granted that these 'good' policies and institutions were used by the developed countries when they themselves were in the process of developing.

For example, raising tariffs for certain industries would constitute a 'policy', whereas the tariff itself could be regarded as an 'institution'. However, such simple distinctions quickly break down. For example, patent law might be regarded as an 'institution', but a country could adopt a 'policy' of not recognizing patents as indeed Switzerland and the Netherlands did until the early twentieth century. Similarly, when we examine competition law we will do so in the context of corporate governance institutions, but also as a part of industrial policy. 1.3. T h e Chapters Chapter two deals mainly with what these days are called industrial, trade and technology policies (or I T T policies for short). This is because, in my view, differences in these policies separate the countries that have been more successful in generating growth and structural change from the others. ITT policies have for a few hundred years stood at the centre of controversies in the theory of economic development.


pages: 430 words: 109,064

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

American ideology, Andrei Shleifer, Asian financial crisis, asset-backed security, bank run, banking crisis, Bernie Madoff, Bonfire of the Vanities, bonus culture, break the buck, business cycle, buy and hold, capital controls, Carmen Reinhart, central bank independence, Charles Lindbergh, 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.


pages: 726 words: 172,988

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

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, business cycle, 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, information asymmetry, 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 Bank That Lived a Little: Barclays in the Age of the Very Free Market by Philip Augar

activist fund / activist shareholder / activist investor, Asian financial crisis, asset-backed security, bank run, banking crisis, Big bang: deregulation of the City of London, Bonfire of the Vanities, bonus culture, break the buck, call centre, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, family office, financial deregulation, financial innovation, fixed income, high net worth, hiring and firing, index card, index fund, interest rate derivative, light touch regulation, loadsamoney, Long Term Capital Management, Martin Wolf, money market fund, moral hazard, Nick Leeson, Northern Rock, offshore financial centre, old-boy network, out of africa, prediction markets, quantitative easing, Ronald Reagan, shareholder value, short selling, Sloane Ranger, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, too big to fail, wikimedia commons, yield curve

Quinton, who would complete forty years’ service in mid-1992 thus entitling him to a full pension, was told that Buxton would take over immediately as chief executive before adding the chairmanship at the end of the year when Quinton retired. By appointing Buxton as chief executive and chairman designate Barclays were defying the Cadbury Committee, an official inquiry into corporate governance, which had recently recommended that such roles be split. Buxton was warned that in due course Barclays would have to comply.11 Taylor’s successors at the Lex column regarded Buxton’s appointment as ‘perplexing’ and said he ‘must take a share of the blame for the lax cost control which has been a substantial part of Barclays’ problem.’12 Buxton did not hold both roles for long, though it was bad debts rather than corporate governance or poor cost control that precipitated further change. When the results for 1992 were released, the dividend to shareholders was cut to below the level paid in 1988 and bad debt provisions of £2.5 billion dragged the bank into loss.

Supremely confident in their business model and with an ideological conviction that business worked best if it was left to its own devices, management assumed that their job was done if they signed off on virtuous values and ethics statements. The UK’s corporate governance reforms of the 1990s – professional boards, board committees, independent risk management and compliance – made no difference. It all looked fine on paper but was worthless if those at the top asked the wrong questions or failed to drill down into suspicious issues. Good governance required knowledge, persistence and an enquiring mind; instead shareholders, regulators and boards themselves took comfort from process and structures. No one reading the detailed descriptions in the Barclays annual reports would have reason to believe that the bank was anything other than a model of good corporate governance. But the procedures had no bite. Not one of the chairmen and chief executives of the period made them stick and none of the boards noticed.

Nils Pratley, ‘Alison Carnwath quits Barclays: wrong time, wrong job’, Guardian, 25 July 2012 2. HM Treasury, ‘A review of corporate governance in UK banks and other financial industry entities’, Final recommendations, 26 November 2009, p. 12 3. Sir David Walker appointed to succeed Marcus Agius as chairman, Barclays.com, 9 August 2012; Martin Vander Weyer, ‘Barclays surprise choice of chairman is Old Father Time with his lyre’, The Spectator, 18 August 2012 4. Barclays Annual Report 2010, p. 18 5. Barclays Annual Report 2011, p. 176 6. Ibid., p. 24 7. Ben Wright, ‘Just who is Bill Winters, the new chief executive of Standard Chartered?’, telegraph.co.uk, 28 February 2015 8. HM Treasury, ‘A review of corporate governance in UK banks and other financial industry entities’, p. 12 9. Kamal Ahmed, ‘If Barclays’ new chief needs to be “safety first” then Antony Jenkins fits the mould’, telegraph.co.uk, 18 August 2012 23.


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Radical Markets: Uprooting Capitalism and Democracy for a Just Society by Eric Posner, E. Weyl

3D printing, activist fund / activist shareholder / activist investor, Affordable Care Act / Obamacare, Airbnb, Amazon Mechanical Turk, anti-communist, augmented reality, basic income, Berlin Wall, Bernie Sanders, Branko Milanovic, business process, buy and hold, carbon footprint, Cass Sunstein, Clayton Christensen, cloud computing, collective bargaining, commoditize, Corn Laws, corporate governance, crowdsourcing, cryptocurrency, Donald Trump, Elon Musk, endowment effect, Erik Brynjolfsson, Ethereum, feminist movement, financial deregulation, Francis Fukuyama: the end of history, full employment, George Akerlof, global supply chain, guest worker program, hydraulic fracturing, Hyperloop, illegal immigration, immigration reform, income inequality, income per capita, index fund, informal economy, information asymmetry, invisible hand, Jane Jacobs, Jaron Lanier, Jean Tirole, Joseph Schumpeter, Kenneth Arrow, labor-force participation, laissez-faire capitalism, Landlord’s Game, liberal capitalism, low skilled workers, Lyft, market bubble, market design, market friction, market fundamentalism, mass immigration, negative equity, Network effects, obamacare, offshore financial centre, open borders, Pareto efficiency, passive investing, patent troll, Paul Samuelson, performance metric, plutocrats, Plutocrats, pre–internet, random walk, randomized controlled trial, Ray Kurzweil, recommendation engine, rent-seeking, Richard Thaler, ride hailing / ride sharing, risk tolerance, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Rory Sutherland, Second Machine Age, second-price auction, self-driving car, shareholder value, sharing economy, Silicon Valley, Skype, special economic zone, spectrum auction, speech recognition, statistical model, stem cell, telepresence, Thales and the olive presses, Thales of Miletus, The Death and Life of Great American Cities, The Future of Employment, The Market for Lemons, The Nature of the Firm, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Thorstein Veblen, trade route, transaction costs, trickle-down economics, Uber and Lyft, uber lyft, universal basic income, urban planning, Vanguard fund, women in the workforce, Zipcar

Under our scheme, institutional investors face a tradeoff. They can be small and fully diversified—within as well as across industries. Or they can be large and partially diversified—not within but only across industries. We also exempt investors that opt to be purely passive (that do not engage in any corporate governance activities). Our approach can be stated as a simple rule: No investor holding shares of more than a single effective firm in an oligopoly and participating in corporate governance may own more than 1% of the market. The actual operationalization of this rule is subtle (e.g., how to define “oligopoly” and an “effective firm”). Questions concern how to address firms that operate in multiple markets, among many others. Readers who are interested in the details may consult our companion study.37 For current purposes, however, the rule should be clear.

Because institutional investors appear to reduce competition among firms they own, they should not be permitted to own firms that are rivals within a single, concentrated industry—with exceptions where institutional investors are small or passive. Yet our policy affects issues other than competition, and we now consider its likely effects on these other areas. GOVERNANCE Beyond the competition benefits of our proposal, it would also greatly improve corporate governance. Commentators have noted that the current system of institutional-investor dominance harms corporate governances. In the words of law professors Ronald Gilson and Jeffrey Gordon: Institutional intermediaries compete and are rewarded on the basis of “relative performance” metrics that give them little incentive to engage in shareholder activism that could address shortfalls in managerial performance; such activity can improve absolute but not relative performance [of the institution].38 In other words, if a large investor spends time and resources improving the performance of Firm X, the higher stock price of Firm X benefits all owners of Firm X.

Furthermore, our proposal could change the nature of competition between mutual funds.39 That competition at present centers primarily on fees, services, and the illusory ability of fund managers to “pick” stocks.40 If our proposal were put into effect, competition would instead focus on the quality of governance that institutional investors provide, leading to a market where competition between institutional investors would directly help solve the Berle-Means problem by holding institutional investors accountable for governing the companies they invest in to maximize returns. This is not to say that our proposal has no drawbacks for corporate governance. Some, though we would guess few, index funds might choose to opt out of governance entirely (as we allow and discuss further below), which could harm governance. By creating dominant, large, concentrated shareholders, our policy might disadvantage minority shareholders, a challenge that other reforms (including applying Quadratic Voting to corporate governance) would have to deal with. Our policy would likely make it slower and more cumbersome for institutional investors to switch the firms they invest in, which could beneficially check excessive stock picking but might also make the market somewhat less liquid (though again, other policies we advocate, like a COST, would help address this).


Deep Value by Tobias E. Carlisle

activist fund / activist shareholder / activist investor, Andrei Shleifer, availability heuristic, backtesting, business cycle, buy and hold, corporate governance, corporate raider, creative destruction, Daniel Kahneman / Amos Tversky, discounted cash flows, fixed income, intangible asset, joint-stock company, margin call, passive investing, principal–agent problem, Richard Thaler, riskless arbitrage, Robert Shiller, Robert Shiller, Rory Sutherland, shareholder value, Sharpe ratio, South Sea Bubble, statistical model, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, Tim Cook: Apple

Business strategy related activism—for example, agitating to have an over-diversified company refocus by spinningoff non-essential assets—also generated significant returns in excess of the market of 4.37 percent. Activist campaigns with no stated goal other than improving shareholder value, efficiency, or simple undervaluation, generated a return of 4.99 percent over the market. Brav et al. found that campaigns targeting capital structure and corporate governance issues generated little excess return. However, other researchers have found that corporate governance reforms led to the largest premia in a sale of the company.62 This research examined activist strategies in the context of the ends sought, finding that the activists were on average successful in achieving their specific goals. For example, activist campaigns focused on business strategy produced profitable businesses, with revenue growth, increased margins, and improved returns on assets.

Activism focused on the capital structure increased pay-out ratios by more than 10 percent and 160% 3% 120% 2% 80% 1% 40% 0% 0% Fi –40% 13 D t-1 t-1 t-1 t-1 t-1 t-2 –1% t-2 lli ng t+ 2 t+ 4 t+ 6 t+ 8 t+ 10 t+ 12 t+ 14 t+ 16 t+ 18 t+ 20 4% t-4 200% t-6 5% 0 t-8 240% 2 6% 4 280% 6 7% 8 320% 0 Abnormal Buy-and-Hold Return 8% Share Turnover Relative to (t-100, t-40) 179 How Hannibal Profits From His Victories Abnormal Share Turnover (Right) Abnormal Buy&Hold Return (Left) FIGURE 9.1â•… Excess Buy-and-Hold Returns Around Schedule 13D Filing Source: Alon P. Brav, Wei Jiang, Randall S. Thomas, and Frank Partnoy. “Hedge Fund Activism, Corporate Governance, and Firm Performance (May 2008).” Journal of Finance, Vol. 63, pp. 1729, 2008. reduced debt. Finally, corporate governance-related activism reduced agency costs as targeted companies tended to reduce assets compared to the average target. (Recall that Michael Jensen found that agency costs lead management teams to waste excess cash flow, growing assets at the expense of profitability.) As we saw in earlier chapters, the returns to deeply undervalued stocks are very strong.

Available at http://www.sec .gov/Archives/edgar/data/895126/000092166912000045/chk13d052512.htm. 57. Ibid. 58. Nicole M. Boyson and Robert M. Mooradian. “Corporate Governance and Hedge Fund Activism (June 1, 2010).” Review of Derivatives Research, Vol. 14, No. 2, 2011. Available at SSRN: http://ssrn.com/abstract=992739. 59. April Klein and Emanuel Zur. “Entrepreneurial Shareholder Activism: Hedge Funds and Other Private Investors (September 2006).” AAA 2007 Financial Accounting & Reporting Section (FARS) Meeting Available at SSRN: http://ssrn .com/abstract=913362 or http://dx.doi.org/10.2139/ssrn.913362. 60. Alon P. Brav, Wei Jiang, Randall S. Thomas, and Frank Partnoy. “Hedge Fund Activism, Corporate Governance, and Firm Performance (May 2008).” Journal of Finance, Vol. 63, pp. 1729, 2008. 61. Ibid. 62. Benjamin S. Solarz. “Stock Picking in Disguise?


pages: 234 words: 53,078

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

accounting loophole / creative accounting, affirmative action, Asian financial crisis, Bretton Woods, business cycle, 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.


pages: 263 words: 80,594

Stolen: How to Save the World From Financialisation by Grace Blakeley

"Robert Solow", activist fund / activist shareholder / activist investor, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, basic income, battle of ideas, Berlin Wall, Big bang: deregulation of the City of London, bitcoin, Bretton Woods, business cycle, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collective bargaining, corporate governance, corporate raider, credit crunch, Credit Default Swap, cryptocurrency, currency peg, David Graeber, debt deflation, decarbonisation, Donald Trump, eurozone crisis, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, fixed income, full employment, G4S, gender pay gap, gig economy, Gini coefficient, global reserve currency, global supply chain, housing crisis, Hyman Minsky, income inequality, inflation targeting, Intergovernmental Panel on Climate Change (IPCC), Kenneth Rogoff, Kickstarter, land value tax, light touch regulation, low skilled workers, market clearing, means of production, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, negative equity, neoliberal agenda, new economy, Northern Rock, offshore financial centre, paradox of thrift, payday loans, pensions crisis, Ponzi scheme, price mechanism, principal–agent problem, profit motive, quantitative easing, race to the bottom, regulatory arbitrage, reserve currency, Right to Buy, rising living standards, risk-adjusted returns, road to serfdom, savings glut, secular stagnation, shareholder value, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, the built environment, The Great Moderation, too big to fail, transfer pricing, universal basic income, Winter of Discontent, working-age population, yield curve, zero-sum game

Politicians’ parochialism would mean that wider environmental and social considerations barely get a look in. Corporate governance would remain a question of top-down, managerial control over workers, which would be just as alienating as work in a private enterprise, even if it is better paid and more secure. Meanwhile, any attempt to challenge the model would be met with staunch resistance from those who benefit from it. The familiar refrain is that socialism threatens to revive the economic problems of the 1970s: union bosses and politicians using their control over inefficient corporations to hold the rest of society to ransom. Whilst this portrayal of 1970s Britain is something of a pastiche, it does have some truth to it. State ownership often did little to improve working conditions, corporate governance, or environmental objectives. Some of the largest state-owned enterprises in the world are also the most corrupt, extractive, and exploitative.

Thankfully, the choice is not between corporations governed in the interests of shareholders or politicians. This is where the “democratic” in democratic socialism comes in — whether a company is nationalised, mutualised, or subject to any other form of collective ownership, workers must either be in charge of making decisions themselves, or rigorously holding other decision-makers to account. The UK Labour Party has recently proposed a series of policies aimed at democratising ownership in the British economy. These range from nationalisation, to worker ownership funds, to boosting support for the co-operative sector. Key parts of the UK’s infrastructure — from transport to utilities — will be nationalised under the next Labour government, based on democratic models of corporate governance. Worker ownership funds will be established, which would see a portion of large firms’ shares being transferred to workers, linked to their profitability.

These pressures have been passed on to corporations via the stock market: with equities representing a significant chunk of the assets held by money managers, the pressure on corporations to meet shareholder needs for immediate returns increased.33 In some cases, rather than being responsible to a board of directors and a few disorganised shareholders, corporations have been held to ransom by “activist investors” demanding that their capital is used in the most efficient way possible. This change in corporate governance has also been reinforced and embedded by the emergence of a new ideology: shareholder value. Together, the increasing power of investors and the emergence of an ideology to support this power has led to the financialisation of the non-financial corporation: businesses are increasingly being used as piggy banks for rich shareholders. This, according to the CEO of General Electric, makes shareholder value “the dumbest idea in the world”34.


Principles of Corporate Finance by Richard A. Brealey, Stewart C. Myers, Franklin Allen

3Com Palm IPO, accounting loophole / creative accounting, Airbus A320, Asian financial crisis, asset allocation, asset-backed security, banking crisis, Bernie Madoff, big-box store, Black-Scholes formula, break the buck, Brownian motion, business cycle, buy and hold, buy low sell high, capital asset pricing model, capital controls, Carmen Reinhart, carried interest, collateralized debt obligation, compound rate of return, computerized trading, conceptual framework, corporate governance, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cross-subsidies, discounted cash flows, disintermediation, diversified portfolio, equity premium, eurozone crisis, financial innovation, financial intermediation, fixed income, frictionless, fudge factor, German hyperinflation, implied volatility, index fund, information asymmetry, intangible asset, interest rate swap, inventory management, Iridium satellite, Kenneth Rogoff, law of one price, linear programming, Livingstone, I presume, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, market bubble, market friction, money market fund, moral hazard, Myron Scholes, new economy, Nick Leeson, Northern Rock, offshore financial centre, Ponzi scheme, prediction markets, price discrimination, principal–agent problem, profit maximization, purchasing power parity, QR code, quantitative trading / quantitative finance, random walk, Real Time Gross Settlement, risk tolerance, risk/return, Robert Shiller, Robert Shiller, shareholder value, Sharpe ratio, short selling, Silicon Valley, Skype, Steve Jobs, The Nature of the Firm, the payments system, the rule of 72, time value of money, too big to fail, transaction costs, University of East Anglia, urban renewal, VA Linux, value at risk, Vanguard fund, yield curve, zero-coupon bond, zero-sum game, Zipcar

Gale, Comparing Financial Systems (Cambridge, MA: MIT Press, 2000). M. Aoki, G. Jackson, and H. Miyajima, Corporate Governance in Japan (Oxford: Oxford University Press, 2007). J. P. Krahnen and R. H. Schmidt (eds.), The German Financial System (Oxford: Oxford University Press, 2004). R. La Porta, F. Lopez-de-Silanes, and A. Shleifer, “Corporate Ownership around the World,” Journal of Finance 54 (April 1999), pp. 471–517. For excellent discussions of corporate governance, see: M. Becht, P. Bolton, and A. Röell, “Corporate Governance and Control” in G. Constantinides, M. Harris, and R. Stulz (eds.), Handbook of the Economics of Finance (Amsterdam: North-Holland, 2003), pp. 1–109. R. Morck and B. Yeung, “Never Waste a Good Crisis: An Historical Perspective on Comparative Corporate Governance,” Annual Review of Financial Economics 1 (2009), pp. 145–179.

Or do you think that international differences in corporate governance are “baked in” by history and differences in legal and financial systems? For a start in thinking about these questions, take a look at the following: R. Morck, ed., A History of Corporate Governance around the World, University of Chicago Press, 2005. T. Khanna, J. Kogan and K. Palepu, “Globalization and Similarities in Corporate Governance: A Cross-Country Analysis,” Review of Economics and Statistics 88 (February 2006), pp. 69–90. ___________ 1For more detailed data and discussion of the material in this section, see F. Allen, M. Chui, and A. Maddaloni, “Financial Structure and Corporate Governance in Europe, the USA, and Asia,” in Handbook of European Financial Markets and Institutions, ed. X. Freixas, P. Hartmann, and C. Mayer (Oxford: Oxford University Press, 2008), pp. 31–67. 2Emerging Asia here includes China, Hong Kong SAR, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan-China, and Thailand. 3Europe here includes Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Slovenia, and Spain. 4Data for Asia are not available for this and the following figures that summarize portfolio allocations. 5There may be owners not yet present on this planet, however.

The largest holdings of shares by other corporations? f. The largest use of trade credit for financing? In each case, define “largest” or “smallest” as total value relative to GDP. 2. Financial system structure What is a keiretsu? Give a brief description. 3. Corporate governance Do Japanese investors play an important role in corporate financial policy and governance? If not, could they? 4. Corporate governance German banks often control a large fraction of the shareholder votes for German businesses. How do they get that voting power? 5. Corporate governance What is meant by the German system of codetermination? 6. Ownership form What is the most common form of ownership of corporations worldwide? 7. Pyramids Suppose that a shareholder can gain effective control of a company with 30% of the shares.


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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, Charles Lindbergh, 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, longitudinal study, 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, Thales and the olive presses, Thales of Miletus, 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.


pages: 504 words: 126,835

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

"Robert Solow", Airbnb, Albert Einstein, American ideology, asset allocation, autonomous vehicles, barriers to entry, Basel III, Bernie Madoff, bitcoin, Black Swan, blockchain, BRICs, Burning Man, business cycle, 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, laissez-faire capitalism, 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 Rise and Fall of American Growth, 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, uber lyft, 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: 370 words: 102,823

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

balance sheet recession, banking crisis, basic income, Bernie Sanders, Bretton Woods, business climate, business cycle, 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, Kickstarter, 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.


pages: 429 words: 120,332

Treasure Islands: Uncovering the Damage of Offshore Banking and Tax Havens by Nicholas Shaxson

Asian financial crisis, asset-backed security, bank run, battle of ideas, Bernie Madoff, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business climate, call centre, capital controls, collapse of Lehman Brothers, computerized trading, corporate governance, corporate social responsibility, creative destruction, Credit Default Swap, David Ricardo: comparative advantage, Double Irish / Dutch Sandwich, failed state, financial deregulation, financial innovation, Fractional reserve banking, full employment, high net worth, income inequality, Kenneth Rogoff, laissez-faire capitalism, land reform, land value tax, light touch regulation, Long Term Capital Management, Martin Wolf, money market fund, New Journalism, Northern Rock, offshore financial centre, oil shock, old-boy network, out of africa, passive income, plutocrats, Plutocrats, Ponzi scheme, race to the bottom, regulatory arbitrage, reserve currency, Ronald Reagan, shareholder value, The Spirit Level, too big to fail, transfer pricing, Washington Consensus

Tax is never the individual states’ top attraction, though: Corporations paying no state taxes owe U.S. federal taxes. Two further lures have turned certain U.S. states into corporate havens. One involves usury; I will explore this in chapter 10. The other involves corporate governance, which is largely governed in the United States by state, not federal, laws. In both of these, Delaware plays a starring role. What ties all these different strands together—the tax, the secrecy, the usury specialties, and the corporate governance—is the political establishment of this tiny state, where everyone knows everyone else and Democrats and Republicans alike seem to share a uniform opinion that local laws must be shaped to satisfy corporate desires, to attract business for the state—and the rest of the world can take care of itself.

At the time of writing, the bill was on the sidelines. 33.Jeff Gerth, “New York Banks Urged Delaware To Lure Bankers,” New York Times, March 17, 1981. 34.Chancery courts emerged out of English ecclesiastical courts and trust laws, where concepts of legal guardianship and fiduciary duty were paramount, and this makes them useful for what Delaware’s Court of Chancery does most of all: rule on the nitty-gritty of how corporations organize themselves internally, and what happens when things go awry: whether internal rules have been followed, whether management insiders are illegally abusing shareholders, and whether corporate statutes were applied fairly. The Chancery court has no close competitor in this arena. 35.Bernard S. Black, “Shareholder Activism and Corporate Governance in the United States,” New Palgrave Dictionary of Economics and the Law 3 (1998): 459–465, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=45100. 36.Senate Bill No. 58, An Act to Amend Title 10 of the Delaware Code Relating to the Court of Chancery, State of Delaware Division of Corporations, http://corp.delaware.gov/sb58.shtml. 37.Matthew Goldstein, “Special Report: For Some People, CDOs Aren’t a Four-Letter Word,” Reuters, May 17, 2010. 38.Madhav Mehra, “Are We Making a Mockery of Independent Directors?” World Council for Corporate Governance, http://www.wcfcg.net/ht130304.htm, accessed August 15, 2010. Dr. Madhav Mehra is president of the council. 39.There are salient differences with the Cayman Islands.

Britain and the Netherlands began to follow the U.S. lead.11 Just before the First World War, however, New Jersey’s governor Woodrow Wilson decided to check the rampant corporate abuses that had emerged as a result of these permissive incorporation laws and put in place progressive new antitrust laws and rules to make corporate managers more accountable to shareholders, investors, and other stakeholders. So corporations flocked to neighboring Delaware, which had already set the standard to be used by tax havens thereafter, by letting corporate managers effectively write their own corporate governance rules. By 1929 two-fifths of Delaware’s income came from corporate fees and taxes, and it led the United States in incorporations, a lead it has never lost. An article in the American Law Review in 1899 noted Delaware’s efforts to win the race to relax corporate standards and called Delaware “a little community of truck-farmers and clam-diggers . . . determined to get her little, tiny, sweet, round, baby hand into the grab-bag of sweet things before it is too late.”


pages: 580 words: 168,476

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

"Robert Solow", affirmative action, Affordable Care Act / Obamacare, airline deregulation, Andrei Shleifer, banking crisis, barriers to entry, Basel III, battle of ideas, Berlin Wall, business cycle, 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, 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: 219 words: 15,438

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

buy and hold, 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 airline, 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.


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

"Robert Solow", addicted to oil, air freight, airline deregulation, Albert Einstein, asset-backed security, bank run, Berlin Wall, Bretton Woods, business cycle, business process, buy and hold, 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, 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, Nelson Mandela, 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, stocks for the long run, 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: 493 words: 139,845

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

Albert Einstein, AltaVista, business cycle, 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, longitudinal study, 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.


pages: 264 words: 115,489

Take the Money and Run: Sovereign Wealth Funds and the Demise of American Prosperity by Eric C. Anderson

asset allocation, banking crisis, Bretton Woods, business continuity plan, business process, buy and hold, 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: 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

accounting loophole / creative accounting, active measures, affirmative action, asset allocation, barriers to entry, Bonfire of the Vanities, business climate, business cycle, 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: 550 words: 124,073

Democracy and Prosperity: Reinventing Capitalism Through a Turbulent Century by Torben Iversen, David Soskice

Andrei Shleifer, assortative mating, augmented reality, barriers to entry, Bretton Woods, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, centre right, cleantech, cloud computing, collateralized debt obligation, collective bargaining, colonial rule, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, deindustrialization, deskilling, Donald Trump, first-past-the-post, full employment, Gini coefficient, hiring and firing, implied volatility, income inequality, industrial cluster, inflation targeting, invisible hand, knowledge economy, labor-force participation, liberal capitalism, low skilled workers, low-wage service sector, means of production, mittelstand, Network effects, New Economic Geography, new economy, New Urbanism, non-tariff barriers, Occupy movement, offshore financial centre, open borders, open economy, passive investing, precariat, race to the bottom, rent-seeking, RFID, road to serfdom, Robert Bork, Robert Gordon, Silicon Valley, smart cities, speech recognition, The Future of Employment, The Great Moderation, The Rise and Fall of American Growth, too big to fail, trade liberalization, union organizing, urban decay, Washington Consensus, winner-take-all economy, working-age population, World Values Survey, young professional, zero-sum game

In a graduate seminar at the LSE that Cathy Boone ran with us, she played a key role in making us clarify our arguments as well as justify our claims. She did this for us at a critical period in our writing. We are deeply grateful to her as well as to the participants in the seminar. For continuing discussion of macroeconomics, as well as the financial crisis and the extended recession, we thank Wendy Carlin, and also David Hope, very warmly. We are very grateful to Ciaran Driver for advice on innovation and corporate governance, as well as highly pertinent comments on advanced capitalism more generally. Economic geography plays a major role in the book, and we have been extremely fortunate to have interacted over some time with the exceptional group of economic geographers associated with the LSE, most notably Michael Storper, Simona Iammarino, Neil Lee, and Thomas Kemeny. Mike Savage, who led the Great British Class Survey, also made a major intellectual contribution by making us think seriously about culture and social networks—in turn closely related to economic geography.

When the threshold into a modern economy is passed, the mutually beneficial, and reinforcing, relationship between advanced capitalism and government takes the following form: Governments provide and/or underwrite an institutional framework which enables advanced sector companies to develop and carry forward their comparative advantages—we see the provision of the conditions in which advanced capitalism can flourish as a central function of advanced governments. This institutional framework covers a wide range of areas, which notably include education, vocational training and higher education, technology transfer and innovation systems, regulation of skilled labor markets and industrial relations, corporate governance and markets for corporate control, those aspects of the welfare state relevant to advanced capitalism (its insurance but not redistributive functions), trade, competition and intellectual property policy, and the macroeconomic regime. Politically, what sustains the equilibrium is a large electoral constituency of educated workers attaching importance to the competence of government parties in managing the institutions promoting successful advanced capitalism.

The Puzzle of Varieties of Advanced Capitalism in an Age of Globalization A large literature, mainly in economics, has been devoted to the idea that there is a single optimal way—a best practice—of organizing economies to pursue growth or maximize GDP. At various stages, especially in the 1980s and 1990s, the OECD, the World Bank, and the IMF propagated these beliefs, sometimes referred to as the Washington Consensus.20 It might have been expected that advanced capitalist democracies would have seen convergence, especially in corporate governance, labor market rules, as well as institutions playing roles in training and in technology transfer. Moreover, advanced companies face broadly similar conditions in international product and financial markets, and with respect to overseas direct investment. But that has not generally been the case, despite major relaxation of government rules in the last quarter-century and despite the fact that companies are free to move (Hall and Soskice 2001).


pages: 340 words: 100,151

Secrets of Sand Hill Road: Venture Capital and How to Get It by Scott Kupor

activist fund / activist shareholder / activist investor, Airbnb, Amazon Web Services, asset allocation, barriers to entry, Ben Horowitz, carried interest, cloud computing, corporate governance, cryptocurrency, discounted cash flows, diversification, diversified portfolio, estate planning, family office, fixed income, high net worth, index fund, information asymmetry, Lean Startup, low cost airline, Lyft, Marc Andreessen, Myron Scholes, Network effects, Paul Graham, pets.com, price stability, ride hailing / ride sharing, rolodex, Sand Hill Road, shareholder value, Silicon Valley, software as a service, sovereign wealth fund, Startup school, Travis Kalanick, uber lyft, VA Linux, Y Combinator, zero-sum game

So VCs will want to ensure that any such expansion is really likely to increase the value of the company as a way to offset the percentage ownership dilution they will feel in the short term. 4. Maintaining Compliance and Good Corporate Governance We are going to explore the various legal duties of board members in chapter 13, but recall that we talked earlier about how the directors and officers generally want to protect themselves from taking on personal liability for any legal mishaps of the company. That’s a good goal, but it requires that the board operate consistent with its legal duties and maintain good corporate governance. So an important role of the board is to simply meet on a regular and consistent basis to keep members informed of the business, enabling them to act in a manner that is consistent with their fundamental role of increasing long-term shareholder value for the common stock and, particularly in the case where the value doesn’t materialize, protect themselves against personal liability.

So I’m sorry to throw a wet blanket on the heroic journey of starting a new company by kicking it off with a visit to your lawyer’s office, and by talking about things like tax and governance. But it’s critical to the health of your future company to understand how to set up your business. So let’s eat our broccoli together. The first part of this chapter is going to focus on some of the tax and corporate governance implications of how many entrepreneurs choose to set up their businesses. It is admittedly a US-centric view of these issues, so, in the interest of transparency for any non-US readers, you may want to consider whether this first section is relevant to your entrepreneurial journey. For the US audience, I offer no such hall pass. What Form Should Your Company Take? Spoiler: C Corp GPs and LPs decided that a partnership was the best corporate structure for their relationship, so why are most startup companies formed as traditional C corporations?

The third seat is reserved for an independent; that is, someone not otherwise affiliated with the company by virtue of being an investor or officer. The selection process here calls for the independent to be approved by the other two board directors. If you take a step back, this is a pretty fair and even configuration of the board—the common shareholders are represented by the CEO, the preferred are represented by VCF1, and we have an ostensibly neutral third party who has no pecuniary interests in the company. Most corporate governance experts would view this as a balanced board. But this isn’t what the boards always look like. In more recent times, some founders have insisted on having what’s called a “common-controlled” board, meaning that there are more board members representing the common shareholders than other classes of shareholders. The reason for this is obvious: If common controls the board, then the VCs can’t really fire the founder CEO, because they likely don’t have the votes to do so.


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

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

Asian financial crisis, banking crisis, Bernie Sanders, business cycle, 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: 515 words: 126,820

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

Airbnb, altcoin, asset-backed security, autonomous vehicles, barriers to entry, bitcoin, blockchain, Blythe Masters, Bretton Woods, business process, buy and hold, 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, disruptive innovation, distributed ledger, Donald Trump, double entry bookkeeping, Edward Snowden, Elon Musk, Erik Brynjolfsson, Ethereum, 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 intelligence, social software, standardized shipping container, 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, uber 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: 413 words: 117,782

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

activist fund / activist shareholder / activist investor, algorithmic trading, Berlin Wall, bonus culture, BRICs, business process, buy and hold, 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: 409 words: 125,611

The Great Divide: Unequal Societies and What We Can Do About Them by Joseph E. Stiglitz

"Robert Solow", accounting loophole / creative accounting, affirmative action, Affordable Care Act / Obamacare, agricultural Revolution, Asian financial crisis, banking crisis, Berlin Wall, Bernie Madoff, Branko Milanovic, Bretton Woods, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, clean water, collapse of Lehman Brothers, collective bargaining, computer age, corporate governance, credit crunch, Credit Default Swap, deindustrialization, Detroit bankruptcy, discovery of DNA, Doha Development Round, everywhere but in the productivity statistics, Fall of the Berlin Wall, financial deregulation, financial innovation, full employment, George Akerlof, ghettoisation, Gini coefficient, glass ceiling, global supply chain, Home mortgage interest deduction, housing crisis, income inequality, income per capita, information asymmetry, job automation, Kenneth Rogoff, Kickstarter, labor-force participation, light touch regulation, Long Term Capital Management, manufacturing employment, market fundamentalism, mass incarceration, moral hazard, mortgage debt, mortgage tax deduction, new economy, obamacare, offshore financial centre, oil shale / tar sands, Paul Samuelson, plutocrats, Plutocrats, purchasing power parity, quantitative easing, race to the bottom, rent-seeking, rising living standards, Ronald Reagan, school vouchers, secular stagnation, Silicon Valley, Simon Kuznets, The Chicago School, the payments system, Tim Cook: Apple, too big to fail, trade liberalization, transaction costs, transfer pricing, trickle-down economics, Turing machine, unpaid internship, upwardly mobile, urban renewal, urban sprawl, very high income, War on Poverty, Washington Consensus, We are the 99%, white flight, winner-take-all economy, working poor, working-age population

At the same time, improved education would help Americans compete in the increasingly competitive global market. The policies that I propose in The Price of Inequality follow directly from my diagnosis of the sources of inequality: at the top, excessive financialization, abuses of corporate governance that lead CEOs to take a disproportionate share of corporate profits, and rent seeking; in the middle, the weakening of unions; at the bottom, discrimination and exploitation. Creating good financial regulations, better systems of corporate governance, and laws that curb further discrimination and predatory lending practices would all help. So too would campaign-finance and other political reforms that would curb opportunities for rent seeking by those at the top. These steps would all reduce the extent of inequality in before-tax incomes.

The repeal of the Glass-Steagall Act played an especial role, not just because of the conflicts of interest that it opened up (made so evident in the Enron and WorldCom scandals), but also because it transmitted the risk-taking culture of investment banking to commercial banks, which should have acted in a far more prudential manner. It was not just financial regulation and regulators that were at fault. There should have been tougher enforcement of antitrust laws. Banks were allowed to grow to be too big to fail—or too big to be managed. And such banks have perverse incentives. When it’s heads I win, tails you lose, too-big-to-fail banks have incentives to engage in excessive risk taking. Corporate governance laws, too, are partly to blame. Regulators and investors should have been aware of the risks that the peculiar incentive structures engendered. These did not even serve shareholder interests well. In the aftermath of the Enron and WorldCom scandals, there was much discussion of the need for reform, and the Sarbanes-Oxley Act represented a beginning. But it didn’t attack perhaps the most fundamental problem: stock options.

Hurricane Katrina and the collapse of the bridge in Minneapolis were grim reminders of how decrepit our infrastructure has become. Investments in infrastructure and technology will stimulate the economy in the short run and enhance growth in the long run. 4. Restore confidence through regulatory reform. Underlying the problems are banks’ bad decisions and regulatory failures. These must be addressed if confidence in our financial system is to be restored. Corporate governance structures that lead to flawed incentive structures designed to generously reward CEOs should be changed and so should many of the incentive systems themselves. It is not just the level of compensation; it is also the form—nontransparent stock options that provide incentives for bad accounting to bloat up reported returns. 5. Create an effective multilateral agency. As the global economy becomes more interconnected, we need better global oversight.


pages: 205 words: 58,054

Private Government: How Employers Rule Our Lives (And Why We Don't Talk About It) by Elizabeth S. Anderson

Affordable Care Act / Obamacare, barriers to entry, call centre, collective bargaining, corporate governance, correlation does not imply causation, declining real wages, deskilling, feminist movement, Frederick Winslow Taylor, full employment, invisible hand, manufacturing employment, means of production, Panopticon Jeremy Bentham, principal–agent problem, profit motive, Ronald Coase, shareholder value, Socratic dialogue, spinning jenny, The Nature of the Firm, The Wealth of Nations by Adam Smith, trickle-down economics

We need different instruments to discern the normatively relevant features of our current institutions of workplace governance. In particular, we need to revive the concept of private government. Private Government: The Very Idea Most modern workplaces are private governments. By this, I do not mean merely that they are in the so-called private sector, and have some internal structure of authority—as specified, for instance, in the rules for corporate governance. I refer rather to a particular sort of constitution of government, under which its subjects are unfree. The notion of private government may seem a contradiction in terms. In the impoverished vocabulary of contemporary public discourse, and to a considerable extent in contemporary political philosophy, government is often treated as synonymous with the state, which, by supposed definition, is part of the public sphere.

Private government is government that has arbitrary, unaccountable power over those it governs. This of course is a matter of degree. Its powers may be checked in certain ways by other governments, by social norms, and by other pressures. Note that the privacy of a government is defined relative to the governed, not relative to the state. The notion of governments that are kept private from the state is much more familiar: we speak of corporate governance, church governance, and so forth, in referring to legal entities that are private in relation to the state. That notion of private government abstracts from the people who are governed and their relation to these governments. It focuses only on the fact that the state is kept out of decision-making in these governments. My definition of private government focuses on the fact that, in many of these governments, the governed are kept out of decision-making as well.

If they receive an employee handbook indicating such limits, the inclusion of a simple disclaimer (which is standard practice) is sufficient to nullify any implied contract exception to at-will employment in most states.18 No wonder they are shocked and outraged when their boss fires them for being too attractive,19 for failing to show up at a political rally in support of the boss’s favored political candidate,20 even because their daughter was raped by a friend of the boss.21 What, then, determines the scope and limits of the employer’s authority, if it is not a meeting of minds of the parties? The state does so, through a complex system of laws—not only labor law, but laws regulating corporate governance, workplace safety, fringe benefits, discrimination, and other matters. In the United States, the default employment contract is employment at will. There are a few exceptions in federal law to this doctrine, notably concerning discrimination, family and medical leave, and labor union activity. For the most part, however, at-will employment, which entitles employers to fire workers for any or no reason, grants the employer sweeping legal authority not only over workers’ lives at work but also over their off-duty conduct.


pages: 302 words: 80,287

When the Wolves Bite: Two Billionaires, One Company, and an Epic Wall Street Battle by Scott Wapner

activist fund / activist shareholder / activist investor, asset allocation, Bernie Madoff, corporate governance, corporate raider, Credit Default Swap, Mark Zuckerberg, Ponzi scheme, price discrimination, Ronald Reagan, short selling, Silicon Valley, Tim Cook: Apple, unbiased observer

The activist aggregator, 13D Monitor, found that between 2006 and 2011 the average one-day “bump” for a stock once an activist had revealed their position was 2.65 percent, with the average return over fifteen months reaching 15.24 percent, dramatically outperforming the payout of the S&P 500 over the same time frame. But do those gains come at a cost? Leo E. Strine, the influential Chief Justice for the Delaware Supreme Court, wrote about activist hedge funds in February 2017’s Yale Law Journal in his 133-page paper titled “Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System.” “There is less reason to think (activists) are making the economy much more efficient, and more reason to be concerned that they are perhaps pushing steady societal wealth on a riskier course that has no substantial long-term upside,” he suggested. Distinguishing between so-called human investors—those of us who save for college or retirement—and the “wolf packs” of activist hedge funds who attempt to instill change in a corporation, Strine argued, What is commonly accepted about activist hedge funds is that they do not originally invest in companies they like and only become active when they become dissatisfied with the corporation’s management or business plan.

“The deficit of experience on Target’s board had contributed to the company’s underperformance,” wrote Ackman in a letter to shareholders.41 On May 29, 2009, at the Target Annual Meeting in Waukesha, Wisconsin, Ackman addressed shareholders, twice appearing to choke up while quoting John F. Kennedy and Martin Luther King Jr.42 “We launched this contest to make sure Target is never known in the future as a once-great company,” he told the room before the results were revealed. When the official numbers came out, 70 percent of shareholders had voted to keep the incumbent board members, handing Ackman a sweeping and resounding defeat. The corporate governance expert Claudia Allen told the Minneapolis Star Tribune that the vote was a milestone for the company, if not for activism itself. “It’s a referendum on the strategic direction of the company,” she said, “and management and the board obviously made a more compelling case.” After the vote, the headline in the hometown paper blared, “Shareholders: Target 4, Ackman 0.” Target may have won its first-ever proxy fight, but it was a costly affair—reportedly $11 million in expenses, not to mention hundreds of hours of agita.

In another missive sent to Yahoo and publicly released, Loeb wrote: We urge the Board to stop wasting valuable company resources and drop its resistance to placing the Third Point nominees on the Board.… We are prepared to join immediately. Once on the Board, our first tasks will be to work with the remaining Board members to find Yahoo! a new leader with the qualifications and integrity to lead the Company and install best practices of corporate governance. The Company can ill afford to continue this misguided fight with its largest outside shareholder while it has so many other fires to put out. There has been enough damage already. Eleven days later, Thompson, who’d been irreparably damaged by the embellishment, resigned.18 That same day, Loeb and Yahoo settled, with the financier getting three board seats: one for himself and one each for Harry Wilson, the CEO of the restructuring firm Maeva, and Michael Wolf, CEO of the media consulting firm Activate.


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

Affordable Care Act / Obamacare, Bernie Madoff, Black Swan, British Empire, business cycle, 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, Johannes Kepler, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, means of production, Naomi Klein, Nelson Mandela, 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

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: 345 words: 92,849

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

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: 355 words: 92,571

Capitalism: Money, Morals and Markets by John Plender

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, business cycle, 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: 457 words: 125,329

Value of Everything: An Antidote to Chaos The by Mariana Mazzucato

"Robert Solow", activist fund / activist shareholder / activist investor, Affordable Care Act / Obamacare, Airbnb, bank run, banks create money, Basel III, Berlin Wall, Big bang: deregulation of the City of London, bonus culture, Bretton Woods, business cycle, butterfly effect, buy and hold, Buy land – they’re not making it any more, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, cleantech, Corn Laws, corporate governance, corporate social responsibility, creative destruction, Credit Default Swap, David Ricardo: comparative advantage, debt deflation, European colonialism, fear of failure, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, full employment, G4S, George Akerlof, Google Hangouts, Growth in a Time of Debt, high net worth, Hyman Minsky, income inequality, index fund, informal economy, interest rate derivative, Internet of things, invisible hand, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour market flexibility, laissez-faire capitalism, light touch regulation, liquidity trap, London Interbank Offered Rate, margin call, Mark Zuckerberg, market bubble, means of production, money market fund, negative equity, Network effects, new economy, Northern Rock, obamacare, offshore financial centre, Pareto efficiency, patent troll, Paul Samuelson, peer-to-peer lending, Peter Thiel, profit maximization, quantitative easing, quantitative trading / quantitative finance, QWERTY keyboard, rent control, rent-seeking, Sand Hill Road, shareholder value, sharing economy, short selling, Silicon Valley, Simon Kuznets, smart meter, Social Responsibility of Business Is to Increase Its Profits, software patent, stem cell, Steve Jobs, The Great Moderation, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Tobin tax, too big to fail, trade route, transaction costs, two-sided market, very high income, Vilfredo Pareto, wealth creators, Works Progress Administration, zero-sum game

A stakeholder understanding of value denotes a very different type of finance: one that is more ‘patient' and supports necessary longterm investments. In some countries this is achieved through public banks, such as the Kreditanstalt fur Wiederaufbau (KfW) in Germany. KfW was intimately involved in Germany's post-war recovery and economic growth, lending more than €1 trillion since its founding in 1948.37 Most of the countries that have public banks tend to follow a stakeholder model of corporate governance, for example by having workers on company boards. Of course, no form of corporate governance is perfect - as the recent Volkswagen (VW) ‘dieselgate' scandal proves. The car maker boasted several attributes which agency theorists consider helpful for far-sighted investment and honest practice, widening the shareholder base and extending its interests beyond short-term profit. German workers, who would have little to gain from tricking the US government, had a powerful say in the company's affairs.

By this he meant that funding investment in infrastructure and innovation (capital development) ought to be done by public utilities, public banks or co-operatives which direct public funds towards medium- and long-term growth rather than short-term returns. But rent-seeking is not limited to the financial sector. It has pervaded non-financial industries as well - through the pressures that financial-sector profitability, exaggerated by monopoly power and implicit public guarantees, place on the corporate governance of non-financial firms. If investors can expect a certain return by putting their money into a fund, spreading the risks across a wide range of money-making instruments, they will only sink the same funds into one industrial project if it offers a much higher return. The return on financial-sector investment sets a minimum for the return on ‘real' fixed investment, a floor which rises as financial operations become more profitable.

Their role should lead to better distribution of productive resources and make better use of resources already employed: for example, drawing on agency theory, a positive link has been made between institutional ownership and innovation.16 But these assessments often seem to neglect the broader picture. It is no coincidence that the case for shareholder activism and supervision often accompanies palpable breakdown of corporate governance: witness the string of corporate scandals such as Enron and WorldCom in the US, Sports Direct in the UK and Volkswagen cheating on diesel engine emissions. Shareholders are not the only gatekeepers. Others include auditors, rating agencies, government regulators, the media and equity analysts -specialists who assess companies for investors. The cause of many of the corporate scandals of recent years, the standard argument goes, is the failure of these gatekeepers to do their job.


Financial Statement Analysis: A Practitioner's Guide by Martin S. Fridson, Fernando Alvarez

business cycle, corporate governance, credit crunch, discounted cash flows, diversification, Donald Trump, double entry bookkeeping, Elon Musk, fixed income, information trail, intangible asset, interest rate derivative, interest rate swap, negative equity, new economy, offshore financial centre, postindustrial economy, profit maximization, profit motive, Richard Thaler, shareholder value, speech recognition, statistical model, time value of money, transaction costs, Y2K, zero-coupon bond

“There has been so much sleeping on the job at the HealthSouth board that it could rise to gross negligence,” asserted Paul Lapides, head of the Corporate Governance Center.29 Particularly troubling were directors’ transactions with HealthSouth and Scrushy. One director earned $250,000 a year in consulting fees from the company, and another received a $5.6 million contract to install glass at a hospital constructed by HealthSouth. Another director bought a $395,000 resort property in conjunction with Scrushy. Six directors and a seventh's wife were participants (in some instances through related entities) in an online medical supply venture to which HealthSouth directed more than $174 million in business. Moreover, for several years, a single board committee oversaw both corporate audit and compensation. Corporate governance experts could find no parallel at another major company for this arrangement, which was especially problematic considering that the audit failure fattened Scrushy's pay package.

Taking into account all of Krispy Kreme's accounting practices, Camelback gave the company an F for earnings quality, a designation the research firm customarily awarded only to companies with three characteristics: 1. Flat or declining fundamentals, providing a motivation to prettify the financials. 2. Visible evidence of unusual or improper accounting or transactions. 3. Evidence of weak corporate governance. The Heat Goes Up Vickrey's criticisms proved astute. Krispy Kreme's chief operating officer resigned less than a month later, a top-level executive change that analyst Skip Carpenter of Thomas Weisel Partners viewed as a sign of more problems to come.26 A major earnings disappointment followed later the same month. The company declined to provide earnings guidance, which is usually a reason to worry.

The outcome was unusual, as institutional investors generally sided with management, both at the time and for many years afterward. At most, institutions sold their shares if they became thoroughly dissatisfied with the way a company was being run. Trying to bring about change was not a widespread institutional practice, even in the 1980s. Therefore, management's main adversaries in battles over corporate governance were aggressive financial operators. During the 1950s, these swashbucklers attracted considerable attention by pushing for strategic redirection through proxy battles. Their modus operandi consisted of striving to obtain majority control of the board through the election of directors at the annual meeting of shareholders. The 1970s brought the tactical shift to hostile takeovers, a type of transaction previously regarded as unsavory by the investment banks that acted as intermediaries in mergers and acquisitions.


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Capitalism: A Ghost Story by Arundhati Roy

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, Nelson Mandela, 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: 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

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, business cycle, 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, 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.


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Profiting Without Producing: How Finance Exploits Us All by Costas Lapavitsas

"Robert Solow", Andrei Shleifer, asset-backed security, bank run, banking crisis, Basel III, borderless world, Branko Milanovic, Bretton Woods, business cycle, capital controls, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, computer age, conceptual framework, corporate governance, credit crunch, Credit Default Swap, David Graeber, David Ricardo: comparative advantage, disintermediation, diversified portfolio, Erik Brynjolfsson, eurozone crisis, everywhere but in the productivity statistics, financial deregulation, financial independence, financial innovation, financial intermediation, financial repression, Flash crash, full employment, global value chain, global village, High speed trading, Hyman Minsky, income inequality, inflation targeting, informal economy, information asymmetry, intangible asset, job satisfaction, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, liberal capitalism, London Interbank Offered Rate, low skilled workers, M-Pesa, market bubble, means of production, money market fund, moral hazard, mortgage debt, Network effects, new economy, oil shock, open economy, pensions crisis, price stability, Productivity paradox, profit maximization, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, race to the bottom, regulatory arbitrage, reserve currency, Robert Shiller, Robert Shiller, savings glut, Scramble for Africa, secular stagnation, shareholder value, Simon Kuznets, special drawing rights, Thales of Miletus, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, total factor productivity, trade liberalization, transaction costs, union organizing, value at risk, Washington Consensus, zero-sum game

Capital has become ‘disconnected’ from established institutions and systems of business, thus making employment short-term and precarious. Ian Clark has developed the argument further by stressing the advantages of financialization for private equity holders.67 These arguments have drawn on the voluminous literature on ‘shareholder value’ and corporate governance, which has been a permanent subtext in the financialization debates, as is clear from the survey above. The issue of corporate governance and control is of long standing in economic theory, and will be considered in chapters 6 and 7 in connection with capital markets, shareholding and income distribution. Influential in the financialization literature has been the work of William Lazonick and Mary O’Sullivan arguing that the ideology of ‘shareholder value’ has led to company ‘downsizing’ and thus to problematic investment outcomes among US corporations.

By the same token, financialization is a far broader phenomenon than the regulation of non-financial enterprises through the stock market. Lordon similarly sees the crisis as the result of a confluence of forces characteristic of financialization, and proposes a list of deep reforms to control finance; Frédéric Lordon, ‘Après la crise financière: “regular” ou refondre?’, Revue de la regulation 5, 2009. 21 Michel Aglietta, ‘Shareholder Value and Corporate Governance: Some Tricky Questions’, Economy and Society 29:1, 2000, pp. 146–59; see also Michel Aglietta and Régis Breton, ‘Financial Systems, Corporate Control and Capital Accumulation’, Economy and Society 30:4, 2001, pp. 433–66. 22 Michel Aglietta and Antoine Rebérioux, Dérives du capitalisme financier, Paris: Albin Michel, 2004. For a sharp critique of the validity of this idea, see Michel Husson, ‘L’ecole de la regulation, de Marx à la Fondation Saint-Simon: un aller sans retour?’

(eds), Financialization at Work, London: Routledge, 2008; Mike Savage and Karel Williams (eds), Remembering Elites, London: John Wiley and Sons, 2008. 67 Paul Thompson, ‘Disconnected Capitalism’, Work, Employment and Society 17, 2003, pp. 359–78; and Ian Clark, ‘Owners and Managers: Disconnecting Managerial Capitalism?’, Work, Employment and Society 23: 2009, pp. 775–86. 68 William Lazonick and Mary O’Sullivan, ‘Maximizing Shareholder Value: A New Ideology for Corporate Governance’, Economy and Society 29:1, 2000. See also William Milberg, ‘Shifting Sources and Uses of Profits: Sustaining US Financialization with Global Value Chains’, Economy and Society 37:3, 2008; and William Milberg and Deborah Winkler, ‘Financialisation and the Dynamics of Offshoring in the USA’, Cambridge Journal of Economics 34, 2010. 69 Masahiko Aoki, Information, Incentives and Bargaining in the Japanese Economy, Cambridge: Cambridge University Press, 1988; Masahiko Aoki, ‘Toward and Economic Model of the Japanese Firm’, Journal of Economic Literature 28, 1990; Masahiko Aoki, ‘The Japanese Firm as a System of Attributes: A Survey and Research Agenda’, in The Japanese Firm: Sources of Competitive Strength, ed.


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The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success by William Thorndike

Albert Einstein, Atul Gawande, Berlin Wall, Checklist Manifesto, choice architecture, Claude Shannon: information theory, collapse of Lehman Brothers, compound rate of return, corporate governance, discounted cash flows, diversified portfolio, Donald Trump, Fall of the Berlin Wall, Gordon Gekko, intangible asset, Isaac Newton, Louis Pasteur, Mark Zuckerberg, NetJets, Norman Mailer, oil shock, pattern recognition, Ralph Waldo Emerson, Richard Feynman, shared worldview, shareholder value, six sigma, Steve Jobs, Thomas Kuhn: the structure of scientific revolutions

In fact, he believed investor relations was an inefficient use of time, and simply refused to provide quarterly earnings guidance or appear at industry conferences. This was highly unconventional behavior at a time when his more accommodating peers were often on the cover of the top business magazines. Teledyne Versus Sarbanes-Oxley Teledyne’s iconoclasm extended to today’s hot-button topic of corporate governance. The company’s board would fail miserably by the current standards of Sarbanes-Oxley legislation. Singleton (like many of the CEOs in this book) was a proponent of small boards. Teledyne’s board consisted of only six directors, including Singleton, half of them insiders. It was an exceptionally talented group, however, and each member had a significant economic interest in the company. In addition to Singleton, Roberts, and Kozmetzky (who retired from Teledyne in 1966 to run the business school at the University of Texas), board members included Claude Shannon, Singleton’s MIT classmate and the father of information theory; Arthur Rock, the legendary venture capitalist; and Fayez Sarofim, the billionaire Houston-based fund manager.

All of this adds up to something much more powerful than a business or investment strategy. Buffett has developed a worldview that at its core emphasizes the development of long-term relationships with excellent people and businesses and the avoidance of unnecessary turnover, which can interrupt the powerful chain of economic compounding that is the essence of long-term value creation. Buffett and Sarbanes-Oxley Buffett’s approach to corporate governance is also unconventional, contradicting many of the dictates of the Sarbanes-Oxley legislation. Buffett believes that the best boards are composed of relatively small groups (Berkshire has twelve directors) of experienced businesspeople with large ownership stakes. (He requires that all directors have significant personal capital invested in Berkshire’s stock.) He believes directors should have exposure to the consequences of poor decisions (Berkshire does not carry insurance for its directors) and should not be reliant on the income from board fees, which are minimal at Berkshire.

See also divestitures —Anders and, 66–67, 68 —Graham and, 117 —Malone and, 100 —outsider CEOs and, 10–11 —Smith and, 162, 164 —Stiritz and, 139–140, 141 AT&T, 85, 96, 97, 98, 106, 202 auctions, 30, 134, 143, 157–158, 164, 189 Bain & Company, 62 Barron’s, 204 Bath Iron Works, 71, 79 Beane, Billy, 4 Beatrice Foods, 138 Beck, Bob, 154, 161 Bell Atlantic, 95 Bell Labs, 85 Berkshire Hathaway, 167–195 —acquisitions by, 172, 173–176, 185–189, 189t, 202, 212 —Buffett’s purchase of, 168–169, 171–172 —capital allocation at, xiii, 57, 181–183, 211–212 —cash flow at, 172, 174, 178, 181 —corporate governance at, 194 —debt used at, 178 —decentralized approach at, 57, 190–191 —dividend policy of, 57 —investor relations at, 57, 192–193 —Munger’s partnership in, 14, 45, 172, 174, 180, 189, 192, 193, 194–195, 202 —stock performance at, 170–171, 171t, 177–178, 177f, 181, 182, 183 —stock repurchase programs of, 185 —stock splits at, 57, 193 Berlin, Isaiah, 5 Bernstein, Carl, 112 BET channel, 94 Beuth, Phil, 26 beverage industry, 150, 152–153, 156–157, 162, 164, 166, 175 Bierbusse, John, 144, 146 Black, Leon, 157 Black Entertainment Television (BET), 94 Bluhdorn, Charles, 53 boards of directors —Anders and, 77 —Buffett and, 194 —General Cinema and, 154, 161 —Graham and, 111, 112, 113, 119, 120, 121, 123, 124 —Malone and, 85, 98 —outsider approach and, 217 —Ralston Purina and, 130, 133, 135, 142 —Singleton and, 45, 50, 51, 54 Bollinger, Judy, 60 Bradlee, Ben, 112, 113, 123, 126 Bresnan, Bill, 93 Buffett, Warren, 129, 167–195 —acquisitions by, 78, 172, 173–176, 185–189, 189t, 202, 212 —Anders and, 70 —background and education of, 169 —Berkshire Hathaway purchase by, 167–169, 171–172 —capital allocation and, xiii, 57, 181–183, 211–212 —capital allocation test of, 225, 226t —cash flow and, 172, 174, 178, 181 —corporate governance and, 194 —debt used by, 178 —decentralized approach of, 57, 190–191 —dividend policy of, 57 —early investment career of, 169–171, 171t —on extraordinary CEOs, vii, 1–2, 7, 37 —float used by, 10, 58, 172, 178, 179, 180–181 —Graham and Dodd’s investing principles and, xiv–xv, 169, 170, 172–173 —Graham at the Washington Post and, 113, 114, 115, 117, 118, 120, 121, 122, 124, 125, 175 —institutional imperative and, 5–6, 192 —insurance business and, 178–181, 180f —investment philosophy of, 57, 170, 171, 172–173, 174, 186–187 —investor relations and, 57, 192–193 —long-term perspective of, 184–185 —Munger’s partnership with, 14, 45, 172, 174, 180, 189, 192, 193, 194–195, 202 —Murphy and, 13, 19, 21, 31–32, 174, 189 —nuts and bolts of approach of, 178–195 —portfolio management by, 183–185, 186–187 —on Singleton, 37 —Singleton compared with, 56–58 —stock performance under, 170–171, 171t, 177–178, 177f, 181, 182, 183 —stock repurchase programs of, 185 —stock splits and, 57, 193 —Welch compared with, 190, 191t —worldview of, 193–195 Buffett Partnership, 171–172, 171t, 181, 184 Burke, Dan, 13, 15, 17–20, 21, 23–27, 28, 32, 33, 118, 125 Burke, Jim, 17 Burke, Steve, 33 Burlington Industries, 182 Burlington Northern Santa Fe, 176, 182, 188, 193, 212 Bush, Wes, 81 BusinessWeek magazine, 7, 53 buyback programs.


pages: 397 words: 112,034

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

affirmative action, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Berlin Wall, Black Swan, Bretton Woods, business cycle, 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, 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, WikiLeaks, 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: 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

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 cycle, 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, Travis Kalanick, two-sided market, Uber and Lyft, Uber for X, uber lyft, 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.


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

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 notes 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

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, banking crisis, 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: 247 words: 68,918

The End of the Free Market: Who Wins the War Between States and Corporations? by Ian Bremmer

affirmative action, Asian financial crisis, banking crisis, Berlin Wall, BRICs, British Empire, centre right, collective bargaining, corporate governance, creative destruction, credit crunch, Credit Default Swap, cuban missile crisis, Deng Xiaoping, diversified portfolio, Doha Development Round, Exxon Valdez, failed state, Fall of the Berlin Wall, Francis Fukuyama: the end of history, global reserve currency, global supply chain, invisible hand, joint-stock company, Joseph Schumpeter, Kickstarter, laissez-faire capitalism, low skilled workers, mass immigration, means of production, megacity, Mikhail Gorbachev, mutually assured destruction, Naomi Klein, Nelson Mandela, new economy, offshore financial centre, open economy, race to the bottom, reserve currency, risk tolerance, shareholder value, South Sea Bubble, sovereign wealth fund, special economic zone, spice trade, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, trade route, tulip mania, uranium enrichment, Washington Consensus, Yom Kippur War, zero-sum game

Norwegian state officials play little or no role in the fund’s day-to-day operations. Other countries with relatively transparent SWFs include Chile and South Korea, both of which hire external fund managers to oversee a large majority of their assets. Singapore’s Temasek and funds in Australia and New Zealand are rated as transparent as Norway’s. Temasek, though state-owned, is formally a private corporation governed by the same company law that applies to the private sector.e The United States has no federal sovereign wealth fund, but the states of Alaska, Alabama, New Mexico, and Wyoming started down this track more than a generation ago. Other funds operate with a little more secrecy. Most analysts consider the Abu Dhabi Investment Authority (ADIA) to be the world’s largest sovereign wealth fund.27 It is wholly owned by the ruling al-Nahyan family of Abu Dhabi, the largest and wealthiest of the United Arab Emirates.

id=91435&sectionid=351020205. 6 Lionel Laurent, “Beware an Abu Dhabi Exposé,” Forbes, Aug. 27, 2009, http://www.forbes.com/2009/08/27/davidson-abu-dhabi-markets-econ-censorship.html. 7 Catrina Stewart, “Russian Regional Governor Said ArcelorMittal Could Lose Coal Mines,” Breaking News 24/7, July 10, 2009, http://blog.taragana.com/n/russian-regional-governor-said-arcelormittal-could-lose-coal-mines-105670. 8 Working Group on Privatization and Corporate Governance of State Owned Assets, “State Owned Enterprises in India: Reviewing the Evidence,” Organisation for Economic Co-operation and Development, Jan. 26, 2009, based on work by Professor Ram Kumar Mishra. 9 Ibid, p. 6. 10 Fortune Global 500, 2009, http://money.cnn.com/magazines/fortune/global500/2009/full_list. 11 Fareed Zakaria, “Meeting with World Leaders at the United Nations,” CNN, Sept. 28, 2008, http://transcripts.cnn.com/TRANSCRIPTS/0809/28/fzgps.01.html. 12 David Lague, “China Corners Market in a High-Tech Necessity,” New York Times, Jan. 22, 2006, http://www.nytimes.com/2006/01/22/business/worldbusiness/22iht-rare.html?

articleID=2069&AspxAutoDetectCookieSupport=1. 2 The phrase “rise of the rest” was popularized by Fareed Zakaria in The Post-American World (New York: Norton, 2008). 3 Karl-Heinz Büchemann, “The ‘Dumbest Idea in the World’: Jack Welch, the Figurehead of Shareholder Value, Disowns His Doctrine,” Atlantic Times, Apr. 2009, http://www.atlantic-times.com/archive_detail.php?recordID=1716. 4 Organisation for Economic Co-operation and Development, Principles of Corporate Governance, May 1999. 5 Welch rejected the approach in an interview with the Financial Times, Mar. 12, 2009: “Shareholder value is a result, not a strategy.” 6 President Hoover was petitioned by more than a thousand leading U.S. economists of the time not to sign the Smoot-Hawley Act. Compared to the previous 1922 Tariff Act (which itself had led to dramatic increases in earlier levels), Smoot-Hawley increased tariffs for 890 groups of goods while decreasing them for 235.


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

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: 471 words: 124,585

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

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, business cycle, 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, Nelson Mandela, 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, stocks for the long run, 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, undersea cable, 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

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, buy and hold, 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, disruptive innovation, 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 airline, low cost carrier, M-Pesa, market design, millennium bug, mittelstand, money market fund, moral hazard, mortgage debt, Myron Scholes, NetJets, 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, 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.


pages: 540 words: 119,731

Samsung Rising: The Inside Story of the South Korean Giant That Set Out to Beat Apple and Conquer Tech by Geoffrey Cain

Apple's 1984 Super Bowl advert, Asian financial crisis, autonomous vehicles, Berlin Wall, business intelligence, cloud computing, corporate governance, creative destruction, don't be evil, Donald Trump, double helix, Dynabook, Elon Musk, fear of failure, Internet of things, John Markoff, Jony Ive, Kickstarter, Mahatma Gandhi, Mark Zuckerberg, megacity, Mikhail Gorbachev, Nelson Mandela, patent troll, rolodex, shareholder value, Silicon Valley, Silicon Valley startup, Skype, Steve Jobs, Superbowl ad, Tim Cook: Apple, too big to fail, WikiLeaks, wikimedia commons

“We knew that this transaction was problematic,” said Cho Seung-hyeon, a lawyer who challenged the deal with a group of corporate governance activists. But he failed to get it reversed in the courts. “It was designed to keep power in the family at any cost.” DIAGRAM DESIGNED BY GORDON BRUCE AND JON CRAINE. USED WITH PERMISSION. Samsung’s ownership structure. Samsung’s theme park, Everland, was the de facto holding company through which the Lee family held control. In 1996, Samsung issued a shareholding mechanism called convertible bonds to Chairman Lee Kun-hee’s children, at a below-market rate. The transfer turned Jay Lee into a major shareholder, the first of many financial chess moves to keep control within the Lee family. It also sparked a massive controversy in South Korea over corporate governance. Two Samsung executives were criminally convicted for the share sale.

When a government trading official named Daniel Lee recommended the government stop earmarking American aid money for Samsung’s sugar business—he thought American assistance was better put to buying fertilizer and wheat, rather than sugar, a luxury for the wealthy—his partner was abruptly accused of small-scale corruption and jailed. “Critics,” Daniel Lee wrote, “called us puppies who did not fear a tiger.” The Republic of Samsung, for both good and bad, was on the ascendant. Henry Cho recounted, “They treated me like a god.” Dynasty Ascendant “I THINK THEY [SAMSUNG] are mimicking exactly the old ways,” Jisoo Lee, a corporate governance lawyer who’d tussled with Samsung at shareholder meetings, told me over coffee after I’d first talked with Henry. He gave me a comparison that Koreans often make. “If you look at the first king of [Korea’s] Yi dynasty, Taejo, he had eight sons, and there was this battle between the fifth and the youngest son,” he said. “The fifth son later became the third king of the Yi dynasty. But he had to fight against his father’s decision to make the youngest son the crown prince.”

More than half of the family leaders of the ten biggest chaebol groups are convicted criminals. All have been pardoned by the president, often without serving prison time. Three of them, including Samsung chairman Lee Kun-hee, have been pardoned twice. From January 2015 to February 2016, the outside members of Samsung Electronics’ board of directors—who were supposed to be independent, as a check on corporate governance—unanimously approved every proposal put forward by the company, except the two times a director was absent. Imagine the heirs of the Carnegies and Rockefellers being so powerful and revered that The New York Times would self-censor its coverage out of deference. Imagine a White House pardoning the heirs of Sam Walton or Ray Kroc, as they ran the operations of Walmart or McDonald’s from their prison cells.


pages: 358 words: 104,664

Capital Without Borders by Brooke Harrington

banking crisis, Big bang: deregulation of the City of London, British Empire, capital controls, Capital in the Twenty-First Century by Thomas Piketty, complexity theory, corporate governance, corporate social responsibility, diversified portfolio, estate planning, eurozone crisis, family office, financial innovation, ghettoisation, haute couture, high net worth, income inequality, information asymmetry, Joan Didion, job satisfaction, joint-stock company, Joseph Schumpeter, liberal capitalism, mega-rich, mobile money, offshore financial centre, race to the bottom, regulatory arbitrage, Robert Shiller, Robert Shiller, South Sea Bubble, the market place, Thorstein Veblen, transaction costs, upwardly mobile, wealth creators, web of trust, Westphalian system, Wolfgang Streeck, zero-sum game

Wealth Management and the State 1. Gerard Hanlon, “Institutional Forms and Organizational Structures: Homology, Trust and Reputational Capital in Professional Service Firms,” Organization 11 (2004): 205. 2. Eliot Freidson, Professionalism: The Third Logic (London: Polity, 2001), 128. 3. Doreen McBarnet, “After Enron: Corporate Governance, Creative Compliance and the Uses of Corporate Social Responsibility,” in Justin O’Brien, ed., Governing the Corporation: Regulation and Corporate Governance in an Age of Scandal and Global Markets, 205–222 (New York: John Wiley & Sons, 2005). 4. Tim Bartley, “Institutional Emergence in an Era of Globalization: The Rise of Transnational Private Regulation of Labor and Environmental Conditions,” American Journal of Sociology 113 (2007): 298. 5. Greta Krippner, “The Financialization of the American Economy,” Socio-Economic Review 3 (2005): 202. 6.

Bullough, “The Fall of Jersey.” 78. Ibid. 79. Manish Bhansali, Deepti Sharma, and Vijay Raina, “Epigastric Heteropagus Twins: 3 Case Reports with Review of Literature,” Journal of Pediatric Surgery 40 (2015): 1204–1208. 80. Zucman, The Hidden Wealth of Nations, 34. 81. Ibid., 30. 82. Doreen McBarnet, “After Enron: Corporate Governance, Creative Compliance and the Uses of Corporate Social Responsibility,” in Justin O’Brien, ed., Governing the Corporation: Regulation and Corporate Governance in an Age of Scandal and Global Markets, 205–222 (New York: John Wiley & Sons, 2005). 83. Zucman, The Hidden Wealth of Nations, 73. 84. Adam Hofri, “Professionals’ Contribution to the Legislative Process: Between Self, Client, and the Public,” Law & Social Inquiry 39 (2014): 96–126. 85. Zucman, The Hidden Wealth of Nations. 86.

“Inherited Wealth,” Buttonwood’s Notebook blog, The Economist, March 18, 2014. 45. Jens Beckert, “Political and Social Interests in the Transfer of Property,” Archives of European Sociology 46 (2005): 359–368. 46. Thomas Piketty, “On the Long-Run Evolution of Inheritance: France 1820–2050,” Working Paper, Paris School of Economics, 2010. 47. Randall Morck, Daniel Wolfenzon, and Bernard Yeung, “Corporate Governance, Economic Entrenchment, and Growth,” Journal of Economic Literature 43 (2005): 655–720. 48. Jens Beckert, Inherited Wealth (Princeton, NJ: Princeton University Press, 2008), 18. 49. Gabriel Zucman, The Hidden Wealth of Nations (Chicago: University of Chicago Press, 2015), 53. 50. Federico Cingano, “Trends in Income Inequality and Its Impact on Economic Growth,” OECD Social, Employment and Migration Working Papers 163, 2015. 51.


pages: 356 words: 103,944

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

affirmative action, Asian financial crisis, bank run, banking crisis, bilateral investment treaty, borderless world, Bretton Woods, British Empire, business cycle, 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, 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: 371 words: 98,534

Red Flags: Why Xi's China Is in Jeopardy by George Magnus

3D printing, 9 dash line, Admiral Zheng, Asian financial crisis, autonomous vehicles, balance sheet recession, banking crisis, Bretton Woods, BRICs, British Empire, business process, capital controls, carbon footprint, Carmen Reinhart, cloud computing, colonial exploitation, corporate governance, crony capitalism, currency manipulation / currency intervention, currency peg, demographic dividend, demographic transition, Deng Xiaoping, Doha Development Round, Donald Trump, financial deregulation, financial innovation, financial repression, fixed income, floating exchange rates, full employment, Gini coefficient, global reserve currency, high net worth, hiring and firing, Hyman Minsky, income inequality, industrial robot, Internet of things, invention of movable type, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, labour market flexibility, labour mobility, land reform, Malacca Straits, means of production, megacity, money market fund, moral hazard, non-tariff barriers, Northern Rock, offshore financial centre, old age dependency ratio, open economy, peer-to-peer lending, pension reform, price mechanism, purchasing power parity, regulatory arbitrage, rent-seeking, reserve currency, rising living standards, risk tolerance, smart cities, South China Sea, sovereign wealth fund, special drawing rights, special economic zone, speech recognition, The Wealth of Nations by Adam Smith, total factor productivity, trade route, urban planning, Washington Consensus, women in the workforce, working-age population, zero-sum game

Small ones were privatised or closed, while larger ones were turned into more major corporations and merged into large industrial groups. The government decided to retain ownership of between 500 to 1,000 large SOEs and allow smaller SOEs to be leased or sold. In 1997, the 15th Party Congress approved plans to convert some SOEs into shareholding corporations, and in 2000, the Shanghai Stock Exchange issued China’s first corporate governance guidance principles, later drafted into legal requirements by the China Securities Regulatory Commission.21 By 2001, 86 per cent of all SOEs had been restructured and roughly 70 per cent had been fully or partially privatised.22 The employment consequences of SOE reforms were considerable, though the private sector absorbed a lot of the slack created. Between 1998 and 2007, the number of workers in SOEs dropped from about 90 million to 62 million, according to National Bureau of Statistics data, but a different sample of SOE changes suggests a fall from 70 to 26 million, while employment in private and foreign firms, for example, rose by 644 and 202 per cent, respectively.23 The government required buyers of sold SOEs to sign a contract of intent to re-employ people, and established various government compensation, subsidy and re-employment funds to help finance re-employment.

Most of the remainder are in social services, education and health, sports, real estate and other sectors.15 China is becoming increasingly active in fortifying the role that SOEs play in advanced manufacturing and the new industries in which it hopes to develop global leadership. The 2013 SOE reform proposals nourished hopes that the raison d’être for state ownership would become more transparent, and that they would mandate a marked improvement in corporate governance. Yet, very little of substance really emerged from the four agencies supposed to be responsible for SOE reform, perhaps partly because their agendas were full of contradictions. The State-owned Assets Supervision and Administration Commission of the State Council (SASAC), which manages around a hundred SOEs under the supervision of the central government (as opposed to the many more under the supervision of local governments), wanted to build globally competitive SOEs.

Since 2015–16, China has experienced a stock market rout, a mini currency crisis, corruption and risk management scandals in the financial sector, a new round of rising non-performing loans, and the exposure of excessive leverage in the finance sector and among SOEs and local governments. All in all, these events add up to a serious problem not just of weak regulation, which is now being partially addressed, but also of weak corporate governance and operational management which are not only being inadequately addressed but are being exacerbated because of new political interference. As I have suggested here, China could become embroiled in a debt crisis arising from the increase in the burden of debt and the decline in capacity to shoulder it, but this does not seem a likely outcome. It is much more likely that debt will loom over the economy, manifesting itself as lower economic growth than as a crisis per se.


pages: 154 words: 47,880

The System: Who Rigged It, How We Fix It by Robert B. Reich

affirmative action, Affordable Care Act / Obamacare, Bernie Madoff, Bernie Sanders, business cycle, clean water, collective bargaining, corporate governance, corporate raider, corporate social responsibility, Credit Default Swap, crony capitalism, cryptocurrency, Donald Trump, ending welfare as we know it, financial deregulation, Gordon Gekko, immigration reform, income inequality, Jeff Bezos, job automation, London Whale, Long Term Capital Management, market fundamentalism, mass incarceration, mortgage debt, Occupy movement, Ponzi scheme, race to the bottom, Robert Bork, Ronald Reagan, shareholder value, too big to fail, trickle-down economics, union organizing, women in the workforce, working poor, zero-sum game

Dalio foresees one of two outcomes: Either we “re-engineer the system so that the pie is both divided and grown well” or else “we will have great conflict and some form of revolution that will hurt most everyone and will shrink the pie.” Dalio proposes the system be reengineered not by stopping hedge funds and other big investors like him from forcing companies to squeeze out every ounce of profits, typically by pushing down wages and by abandoning workers and communities; not by changing corporate governance to give workers more say or giving them more ownership of the companies they work in; not by busting up giant Wall Street hedge funds and banks—not, in short, by doing anything that could possibly threaten Dalio’s own considerable wealth and power. Instead, he suggests convening a “bipartisan commission.” Hello? Several billionaires entered the 2020 presidential race. One of them, Tom Steyer, whose net worth as of 2019 was $1.6 billion, made “fighting inequality” a priority.

The progressive era welled up because millions of Americans saw that wealth and power at the top were undermining American democracy and stacking the economic deck. Millions of Americans overcame their cynicism and began to mobilize. In order to reverse the vicious cycle in which we now find ourselves, it’s important to understand how it began and how it has maintained its momentum. Three big systemic changes over the last forty years have reallocated power upward in the system. They are (1) the shift in corporate governance from stakeholder to shareholder capitalism, (2) the shift in bargaining power from large unions to giant corporations, and (3) the unleashing of the financial power of Wall Street. Each of these power shifts began when a few clever people discovered ways to exploit the system. They succeeded by using their wealth and power to alter laws and rules that had previously prevented such exploitation.

I hope you now see that the only way to do the admirable things you advocate in your public pronouncements—ensure that the needs of all our citizens are being met, lift middle-class incomes, fulfill the promise of equal opportunity, and end climate change—is to do something you have shown no interest in doing: Give up your power and get your colleagues at the Business Roundtable and other members of the American oligarchy to do the same. Then support systemic changes that ensure that no one can ever again siphon off so many of the economic gains for themselves while undermining so much of our democracy. As I’ve said, we need to change corporate governance so workers and communities have a larger voice in corporate decision making. Although your Business Roundtable now appears receptive to this idea, I very much doubt you and your fellow CEOs are prepared to sacrifice share prices (as well as all your pay that’s tied to those share prices) to achieve it—which is what it will require. Recall that since 1989 most of the gains in the stock market have come at the expense of workers.


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

activist fund / activist shareholder / activist investor, Albert Einstein, Andrei Shleifer, asset allocation, Atul Gawande, backtesting, beat the dealer, Black Swan, business cycle, butter production in bangladesh, buy and hold, 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.


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

Asian financial crisis, asset allocation, backtesting, buy and hold, 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.


Making Globalization Work by Joseph E. Stiglitz

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, Jones Act, Kenneth Arrow, Kenneth Rogoff, low skilled workers, manufacturing employment, market fundamentalism, Martin Wolf, microcredit, moral hazard, new economy, 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.10 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 My 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: 581 words: 162,518

We the Corporations: How American Businesses Won Their Civil Rights by Adam Winkler

1960s counterculture, affirmative action, Affordable Care Act / Obamacare, anti-communist, Bernie Sanders, British Empire, Cass Sunstein, clean water, collective bargaining, corporate governance, corporate personhood, corporate social responsibility, desegregation, Donald Trump, financial innovation, glass ceiling, income inequality, invisible hand, joint-stock company, laissez-faire capitalism, land reform, obamacare, offshore financial centre, plutocrats, Plutocrats, Powell Memorandum, profit maximization, profit motive, race to the bottom, Ralph Nader, Ralph Waldo Emerson, refrigerator car, Robert Bork, Ronald Reagan, Rosa Parks, shareholder value, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, the scientific method, too big to fail, trade route, transcontinental railway, Unsafe at Any Speed, Upton Sinclair, yellow journalism

After Independence, the Framers would eventually adopt the Constitution, the most potent symbol of the new nation—and one that preserved many of the features of the colonial corporate charters. Just as the colonial corporations were bound by written charters that specified limits on the power of officeholders and guaranteed the rights of members, so was the new nation. The Constitution was America’s charter, its founding document, and the Constitution’s shape and scope reflected the Framers’ experience with corporate governance. Indeed, as we have seen, democracy and constitutionalism were intimately tied up with the corporation from the very beginning. America was founded by the Virginia Company, fundamentally shaped by the colonists’ experience with the Massachusetts Bay Company, and inspired to Independence by the East India Company. Although the Founders at the Constitutional Convention never considered whether corporations should be afforded individual rights under the Constitution, the idea of the corporation nonetheless influenced the constitutional system they established.

In an 1814 case, Supreme Court justice Joseph Story explained that “where a corporation is established in a foreign country, by a foreign government, it is undoubtedly an alien corporation.” Nor would it have been completely outrageous for Binney to argue that a corporation was a citizen of a particular state—the type of citizenship at issue in diversity cases under the Judiciary Act and Article III. Then and now, a corporation is incorporated in one state and must follow that state’s laws on issues of corporate governance, such as the fiduciary duties of officers and the voting rights of stockholders. As in Binney’s day, Americans today might speak of a Delaware corporation or a New York corporation.24 Even if corporations could arguably be seen as citizens for legal purposes, Binney understood how difficult it would be for him to win with this argument. As a student of rhetoric and persuasion, he knew that even the most compelling logic falters if it defies common sense.

“In fine,” the Nation observed, “directors do not direct.”27 Had the policyholders somehow overcome their collective action problem, they faced a series of other hurdles created by the recent corporate law reforms. The “race to the bottom” that began when New Jersey loosened its laws to lure reincorporation by large corporations, like Standard Oil and American Tobacco, translated into increasingly lax rules of corporate governance. Older rules that held managers liable for negligent decision-making were replaced by the “business judgment rule,” which effectively immunized management from liability for bad decisions so long as those decisions were made in good faith to serve the business. Shareholders saw their legal right to inspect the books and records diminished. Laws requiring unanimous shareholder consent for fundamental changes in the business were watered down to allow rule by the majority.


pages: 273 words: 34,920

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

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?’


pages: 398 words: 105,917

Bean Counters: The Triumph of the Accountants and How They Broke Capitalism by Richard Brooks

accounting loophole / creative accounting, asset-backed security, banking crisis, Big bang: deregulation of the City of London, blockchain, BRICs, British Empire, business process, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Strachan, Deng Xiaoping, Donald Trump, double entry bookkeeping, Double Irish / Dutch Sandwich, energy security, Etonian, eurozone crisis, financial deregulation, forensic accounting, Frederick Winslow Taylor, G4S, intangible asset, Internet of things, James Watt: steam engine, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, light touch regulation, Long Term Capital Management, low cost airline, new economy, Northern Rock, offshore financial centre, oil shale / tar sands, On the Economy of Machinery and Manufactures, Ponzi scheme, post-oil, principal–agent problem, profit motive, race to the bottom, railway mania, regulatory arbitrage, risk/return, Ronald Reagan, savings glut, short selling, Silicon Valley, South Sea Bubble, statistical model, supply-chain management, The Chicago School, too big to fail, transaction costs, transfer pricing, Upton Sinclair, WikiLeaks

., The Hidden Wealth of Nations – the Scourge of Tax Havens (University of Chicago Press, US, 2015) ACADEMIC AND PROFESSIONAL PAPERS Beattie, Vivien; Fearnley, Stella; and Hines, Tony, ‘Does IFRS Undermine UK Reporting Integrity?’ (Accountancy, December 2008) Bush, T., Divided by Common Language – Where Economics Meets the Law: US versus non-US financial reporting models (ICAEW, UK, June 2005), http://www.icaew.com/-/media/corporate/files/technical/corporate-governance/dialogue-in-corporate-governance/divided-by-common-language-publication.ashx?la=en Matthews, D., and Pirie, J., Auditors Talk: An Oral History of the Profession from the 1920s to the Present Day (Taylor & Francis, UK, 2001) Napier, C. J., ‘Intersections of Law and Accountancy: Unlimited Auditor Liability in the United Kingdom’ (Accounting, Organisations and Society, UK, Vol. 23, No. 1, pp.105–28, 1998) Shah, A., Systemic Regulatory Arbitrage: A Case Study of KPMG (Suffolk Business School, UK, 2015) Sikka, Professor P., and Mitchell, A., The Pinstripe Mafia: How Accountancy Firms Destroy Societies (Association of Accountancy & Business Affairs, UK, 2011) Wootton, C.

By 2016, across 150 countries, the Big Four employed 890,000 people (40,000 of them partners), which was more than the six most valuable companies in the world combined.13 NEW PRIORITIES For the past decade, all the firms’ real-terms global growth has come from selling more consulting services. This partly reflects a talent for turning any change into a fee-earning opportunity. Dealing with corporate governance changes after Enron and WorldCom, for example, became a consultancy industry in itself. Advising on post-crisis financial regulation has more than made up for the minor setback of 2008. KPMG starred in the ultimate ‘nothing succeeds like failure’ story. Although – more than any other firm – it had missed the devaluation of subprime mortgages that led to a world banking collapse, before long it was brought in by the European Central Bank for a ‘major role in the asset quality review process’ of most of the banks that now needed to be ‘stress-tested’.14 With wealth come the resources and capacity to expand and adapt, too.

Official or minister Government job Big Four job with year appointed Peter Mandelson Trade and industry secretary, 1998 Consultant, EY, 1999 Alan Milburn Health secretary, 1999–2003 Chairman, PwC Health Industries Oversight Board, 2013 Charles Clarke Education secretary, 2002–4 Home secretary, 2004–6 Consultant, KPMG, 2008 Jacqui Smith Home secretary, 2007–9 Consultant, KPMG, 2010 Ian Pearson Economic secretary to the Treasury, 2008–10 Member, PwC Advisory Board, 2011 Lord (Jack) McConnell First minister (Labour), Scotland, 2001–7 Member, PwC Advisory Board, 2011 Lord (Gus) O’Donnell Cabinet secretary and head of the civil service, 2005 –11 Chair, PwC Public Interest Board, 2015 Lord (Jonathan) Evans Director general, MI5, 2007–13 Member, KPMG Public Interest Committee, 2017 Lord (John) McFall Labour MP and senior member, Treasury select committee, until 2010 Senior adviser to KPMG on regulatory and corporate governance, 2012 Sir Steve Robson Second permanent secretary, Treasury, Financial Services, until 2011 Chair, KPMG Public Interest Committee, 2012 Dave Hartnett Permanent secretary, Tax, HMRC, to 2012 Consultant, Deloitte, 2013 Sir Nicholas Montagu Chairman, HMRC, to 2005 Member, PwC Advisory Board, 2004 Simon Virley Director general, Energy, Department of Energy and Climate Change, to 2015 Head of power and utilities, KPMG, 2015 Sir Leigh Lewis Permanent secretary, Department of Work and Pensions, until 2011 Member, PwC Advisory Board, 2011 Sir John Scarlett Head of MI6, 2004–9 Advisor, PwC, 2010 Lord Strathclyde Leader of the House of Lords, 2010–13 Advisor, PwC, 2010 Paul Kirby Head of No. 10 Policy Unit, 2011–13 (having previously been KPMG consultant) Head of government and public sector, KPMG, 2013 Neil Sherlock Special adviser to the deputy prime minister, 2012–13 Head of reputational strategy, PwC, 2013 Lord (Norman) Warner Health minister, 2003–06 Strategic adviser, Deloitte, 2008 Mark Britnell Director general, Commissioning, NHS, 2007–09 Head of KPMG health services, 2009 Mike Farrar Chief executive, North-West Strategic Health Authority, 2006–11 Chair, PwC Public Sector Health Board Sir Peter Westmacott UK ambassador to United States, 2012–16 Non-executive, EY, 2017 Andrew Mitchell International development secretary, 2010–12 Consultant, EY, 2016 Mats Persson Special adviser on EU to David Cameron 2015–16 Head of international trade, EY, 2016 Paul Skinner Chairman, Infrastructure UK (part of HM Treasury), 2009–13 Chairman, Defence Equipment & Support, 2014–present Member, PwC Advisory Board, 2015 Jon Pain Managing director, Supervision, Financial Services Authority, 2008–11 Partner, regulatory practice, KPMG, 2011 David Strachan Director, Financial Stability, Financial Services Authority, 2008–11 Head of regulatory strategy, Deloitte, 2011 Margaret Cole Managing director, Enforcement & Financial Crimes, Financial Services Authority, to 2012 Chief risk officer and general counsel, PwC, 2012 REGULATION ISSUE If the bean counters get a good deal from Whitehall, it’s nothing next to their treatment from the regulators that they have also captured.


pages: 382 words: 105,166

The Reckoning: Financial Accountability and the Rise and Fall of Nations by Jacob Soll

accounting loophole / creative accounting, bank run, Bonfire of the Vanities, British Empire, collapse of Lehman Brothers, computer age, corporate governance, creative destruction, Credit Default Swap, delayed gratification, demand response, discounted cash flows, double entry bookkeeping, financial independence, Frederick Winslow Taylor, God and Mammon, High speed trading, Honoré de Balzac, inventory management, invisible hand, Isaac Newton, James Watt: steam engine, joint-stock company, Joseph Schumpeter, new economy, New Urbanism, Nick Leeson, Ponzi scheme, Ralph Waldo Emerson, Scientific racism, South Sea Bubble, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, trade route

Today, Andersen employs a skeleton staff of two hundred to manage its continuing litigation, down from 85,000 worldwide.27 In response to Enron and a cascade of other corporate accounting scandals and bankruptcies (among them giants like Tyco International, Adelphia, and Peregrine Systems), President George W. Bush signed the 2002 Sarbanes-Oxley Act, which set up the Public Company Accounting Oversight Board, an attempt to guarantee auditor independence and corporate governance and to clarify the rules of corporate auditing and financial disclosure. This was a pure corporate accountability law. “The era of low standards and false profits is over,” President Bush said. “No boardroom in America is above or beyond the law.” The day of reckoning had come, he intoned, at least for the accountants: “Free markets are not a jungle in which only the unscrupulous survive, or a financial free-for-all guided only by greed. . . .

., 16, 120; Ten Have, “Simon Stevin of Bruges,” 242, 244; Geijsbeek, Ancient Double-Entry Bookkeeping, 114; Kees Zandvliet, Maurits Prins van Oranje [Exhibition catalogue Rijksmuseum] (Amsterdam: Rijksmuseum Amsterdam/Waanders Uitgevers Zwolle, 2000), 276–277. 17. Quotations from Barlaeus, Marie de Medicis entrant dans l’Amsterdam, 16, 59–63. 18. J. Matthijs de Jongh, “Shareholder Activism at the Dutch East India Company in 1622: Redde Rationem Villicationis Tuae! Give an Account of Your Stewardship!” (paper presented at the Conference on the Origins and History of Shareholder Advocacy, Yale School of Management, Millstein Center for Corporate Governance and Performance, November 6–7, 2009), 1–56; A Translation of the Charter of the Dutch East India Company (Verenigde Oostindische Compagnie, or VOC), trans. Peter Reynders (Canberra: Map Division of the Australasian Hydrographic Society, 2009). 19. A Translation of the Charter of the Dutch East India Company, 3. 20. Jeffrey Robertson and Warwick Funnell, “The Dutch East India Company and Accounting for Social Capital at the Dawn of Modern Capitalism 1602–1623,” Accounting Organizations and Society 37, no. 5 (2012): 342–360. 21.

Kees Camfferman and Stephen A. Zeff, Financial Reporting and Global Capital Markets: A History of the International Accounting Standards Committee 1973–2000 (Oxford: Oxford University Press, 2006), 21–24; “The Norwalk Agreement,” www.fasb.org/news/memorandum.pdf. 11. Barbara Ley Toffler, Final Accounting: Ambition, Greed and the Fall of Arthur Andersen (New York: Crown, 2003), 18; Robert A. G. Monks and Nell Minow, Corporate Governance (New York: John Wiley & Sons, 2008), 563. 12. Toffler, Final Accounting, 28, 41. 13. Ibid., 14. 14. Allen and McDermott, Accounting for Success, 171–172. 15. Ibid., 173. 16. Ibid., 175–181. 17. Philip G. Joyce, Congressional Budget Office: Honest Numbers, Power, and Policymaking (Washington, DC: Georgetown University Press, 2011), 16–17. 18. Richard Cantor and Frank Packer, “Sovereign Credit Ratings,” Current Issues in Economics and Finance of the Federal Reserve Board of New York 1, no. 3 (1995): 41. 19.


pages: 332 words: 81,289

Smarter Investing by Tim Hale

Albert Einstein, asset allocation, buy and hold, buy low sell high, capital asset pricing model, collapse of Lehman Brothers, corporate governance, credit crunch, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, Donald Trump, equity premium, Eugene Fama: efficient market hypothesis, eurozone crisis, fiat currency, financial independence, financial innovation, fixed income, full employment, implied volatility, index fund, information asymmetry, Isaac Newton, John Meriwether, Long Term Capital Management, Northern Rock, passive investing, Ponzi scheme, purchasing power parity, quantitative easing, random walk, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, South Sea Bubble, technology bubble, the rule of 72, time value of money, transaction costs, Vanguard fund, women in the workforce, zero-sum game

The salutary lesson of the Japanese market that languished 60% below its peak almost twenty years later is one reason why you need to diversify globally. Why does ‘home bias’ occur? There are a number of suggested reasons why home bias occurs, such as avoiding non-domestic risks, the costs of investing overseas, information asymmetries – where investors know more about domestic stocks (or at least think they do), corporate governance differences and behavioural biases. It is likely that it is a mix of all of these to some extent, and will vary by investor. On the behavioural side of the equation, some investors appear to have a distaste for, or fear of, foreign stock (Huberman, 2001). Others tend to suffer regret when they own a portfolio that behaves differently from that of their home market (Solnick, 2008). Familiarity, patriotism and overconfidence, for example in names like Marks & Spencer or BP, sometimes makes investors feel that they are investing in something less risky, or with better prospects than an unknown name.

The flip side of the coin is that the expected return for providing capital (owning equities or bonds) is higher than that of developed markets. Many investors seem to forget that these risks are quite considerable and need to be taken in a controlled manner and in moderation; they include corruption, political instability, the lack of an established rule of law, limited freedom of the press, weak corporate governance and the sudden imposition of foreign exchange restrictions (remember Malaysia in 1997), to name a few. As we stated in Chapter 6 and cover further in Chapter 12, sensible expectations for higher expected returns are probably in the region of 1% to 2% above developed market equities over the longer term. How much should you allocate to emerging markets? We already know that many companies listed in developed markets have high exposure to emerging economies and we know that owning local companies may well be a riskier proposition.

Table 11.3 Peak-to-trough falls and recoveries for UK equities 1900–2012 11.3 Return enhancer – emerging market equities Investing in emerging markets, i.e. economies that are developing from an agricultural to an industrial and service-oriented structure, offers two benefits: first, these markets may be out of sync with the UK and other developed markets, providing a diversification benefit; and second, investors expect higher long-term returns relative to developed equity markets partly due to projected higher growth rates in these economies, but primarily in compensation for the additional risks they take on, i.e. the cost of capital is higher. These material risks include: political instability; currency risk; a lack of open and free markets; higher costs to invest; insufficient legal protection for owners; limited liquidity; and poor corporate governance. Defining what is an emerging market is not clear cut No precise definition exists, but measures such as GDP per capita, the regulatory environment and stock market size, steer index providers to a similar set of markets. A single variable of US$25,000 per capita GDP defines the boundary in practice between developed and emerging markets. MSCI, for example, identifies twenty-one emerging markets: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.


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Occupy by Noam Chomsky

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: 196 words: 57,974

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

affirmative action, barriers to entry, Bonfire of the Vanities, borderless world, business process, Charles Lindbergh, 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.


pages: 322 words: 87,181

Straight Talk on Trade: Ideas for a Sane World Economy by Dani Rodrik

3D printing, airline deregulation, Asian financial crisis, bank run, barriers to entry, Berlin Wall, Bernie Sanders, blue-collar work, Bretton Woods, BRICs, business cycle, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, central bank independence, centre right, collective bargaining, conceptual framework, continuous integration, corporate governance, corporate social responsibility, currency manipulation / currency intervention, David Ricardo: comparative advantage, deindustrialization, Donald Trump, endogenous growth, Eugene Fama: efficient market hypothesis, eurozone crisis, failed state, financial deregulation, financial innovation, financial intermediation, financial repression, floating exchange rates, full employment, future of work, George Akerlof, global value chain, income inequality, inflation targeting, information asymmetry, investor state dispute settlement, invisible hand, Jean Tirole, Kenneth Rogoff, low skilled workers, manufacturing employment, market clearing, market fundamentalism, meta analysis, meta-analysis, moral hazard, Nelson Mandela, new economy, offshore financial centre, open borders, open economy, Pareto efficiency, postindustrial economy, price stability, pushing on a string, race to the bottom, randomized controlled trial, regulatory arbitrage, rent control, rent-seeking, Richard Thaler, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, Sam Peltzman, Silicon Valley, special economic zone, spectrum auction, Steven Pinker, The Rise and Fall of American Growth, the scientific method, The Wealth of Nations by Adam Smith, Thomas L Friedman, too big to fail, total factor productivity, trade liberalization, transaction costs, unorthodox policies, Washington Consensus, World Values Survey, zero-sum game, éminence grise

But the United States, Japan, and the European nations have evolved historically under institutional setups that differ significantly. These differences are revealed in divergent practices in labor markets, corporate governance, social welfare systems, and approaches to regulation. That these nations have managed to generate comparable amounts of wealth under different rules is an important reminder that there is not a single blueprint for economic success. Yes, markets, incentives, property rights, stability, and predictability are important. But they do not require cookie-cutter solutions. Economic performance fluctuates, even among advanced countries, so institutional fads are common. In recent decades, European social democracy, Japanese-style industrial policy, the US model of corporate governance and finance, and Chinese state capitalism have periodically come into fashion, only to recede from attention once their stars faded.

Most societies control guns directly because we cannot perfectly monitor and discipline behavior, and the social costs of failure are high. Similarly, caution dictates direct regulation of cross-border flows. As the advocates of capital mobility tirelessly point out, benefiting from financial globalization has a long list of prerequisites, including protection of property rights, sound contract enforcement, eradication of corruption, enhanced transparency and financial information, sound corporate governance, monetary and fiscal stability, debt sustainability, market-determined exchange rates, high-quality financial regulation, and prudential supervision. The illogic of presuming first-world institutions as a prerequisite to what is supposed to enable economic growth in the first place is too obvious to elaborate. The list is not only long; it is also open ended. As the experience of the advanced countries with the global financial crisis has demonstrated, even apparently the most sophisticated regulatory and supervisory systems are far from being failsafe.

There is no “one way” to prosperity. Once we acknowledge that the core institutional infrastructure of the global economy must be built at the national level, it frees up countries to develop the institutions that suit them best. The United States, Europe, and Japan are all successful societies; they have each produced comparable amounts of wealth over the long term. Yet the regulations that cover their labor markets, corporate governance, antitrust, social protection, and even banking and finance have differed considerably. These differences enable journalists and pundits to anoint a succession of these “models”—a different one each decade—as the great success for all to emulate. Such fads should not blind us to the reality that none of these models can be deemed a clear winner in the contest of “capitalisms.” The most successful societies of the future will leave room for experimentation and allow for further evolution of institutions over time.


pages: 320 words: 87,853

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

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, business cycle, 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, social intelligence, 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.


pages: 654 words: 120,154

The Firm by Duff McDonald

"Robert Solow", 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, Kickstarter, laissez-faire capitalism, Mahatma Gandhi, Nelson Mandela, 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: 918 words: 257,605

The Age of Surveillance Capitalism by Shoshana Zuboff

Amazon Web Services, Andrew Keen, augmented reality, autonomous vehicles, barriers to entry, Bartolomé de las Casas, Berlin Wall, bitcoin, blockchain, blue-collar work, book scanning, Broken windows theory, California gold rush, call centre, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, choice architecture, citizen journalism, cloud computing, collective bargaining, Computer Numeric Control, computer vision, connected car, corporate governance, corporate personhood, creative destruction, cryptocurrency, dogs of the Dow, don't be evil, Donald Trump, Edward Snowden, en.wikipedia.org, Erik Brynjolfsson, facts on the ground, Ford paid five dollars a day, future of work, game design, Google Earth, Google Glasses, Google X / Alphabet X, hive mind, impulse control, income inequality, Internet of things, invention of the printing press, invisible hand, Jean Tirole, job automation, Johann Wolfgang von Goethe, John Markoff, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Kevin Kelly, knowledge economy, linked data, longitudinal study, low skilled workers, Mark Zuckerberg, market bubble, means of production, multi-sided market, Naomi Klein, natural language processing, Network effects, new economy, Occupy movement, off grid, PageRank, Panopticon Jeremy Bentham, pattern recognition, Paul Buchheit, performance metric, Philip Mirowski, precision agriculture, price mechanism, profit maximization, profit motive, recommendation engine, refrigerator car, RFID, Richard Thaler, ride hailing / ride sharing, Robert Bork, Robert Mercer, Second Machine Age, self-driving car, sentiment analysis, shareholder value, Shoshana Zuboff, Silicon Valley, Silicon Valley ideology, Silicon Valley startup, slashdot, smart cities, Snapchat, social graph, social web, software as a service, speech recognition, statistical model, Steve Jobs, Steven Levy, structural adjustment programs, The Future of Employment, The Wealth of Nations by Adam Smith, Tim Cook: Apple, two-sided market, union organizing, Watson beat the top human players on Jeopardy!, winner-take-all economy, Wolfgang Streeck

Digital dispossession is not an episode but a continuous coordination of action, material, and technique, not a wave but the tide itself. Google’s leaders understood from the start that their success would require continuous and pervasive fortifications designed to defend their “repetitive sin” from contest and constraint. They did not want to be bound by the disciplines typically imposed by the private market realm of corporate governance or the democratic realm of law. In order for them to assert and exploit their freedom, democracy would have to be kept at bay. “How did they get away with it?” It is an important question that we will return to throughout this book. One set of answers depends on understanding the conditions of existence that create and sustain demand for surveillance capitalism’s services. This theme was summarized in Chapter 2’s discussion of the “collision.”

These include (1) the relentless pursuit and defense of the founders’ “freedom” through corporate control and an insistence on the right to lawless space; (2) the shelter of specific historical circumstances, including the policies and juridical orientation of the neoliberal paradigm and the state’s urgent interest in the emerging capabilities of behavioral surplus analysis and prediction in the aftermath of the September 2001 terror attacks; and (3) the intentional construction of fortifications in the worlds of politics and culture, designed to protect the kingdom and deflect any close scrutiny of its practices. II. The Cry Freedom Strategy One way that Google’s founders institutionalized their freedom was through an unusual structure of corporate governance that gave them absolute control over their company. Page and Brin were the first to introduce a dual-class share structure to the tech sector with Google’s 2004 public offering. The two would control the super-class “B” voting stock, shares that each carried ten votes, as compared to the “A” class of shares, which each carried only one vote. This arrangement inoculated Page and Brin from market and investor pressures, as Page wrote in the “Founder’s Letter” issued with the IPO: “In the transition to public ownership, we have set up a corporate structure that will make it harder for outside parties to take over or influence Google.… The main effect of this structure is likely to leave our team, especially Sergey and me, with increasingly significant control over the company’s decisions and fate, as Google shares change hands.”8 In the absence of standard checks and balances, the public was asked to simply “trust” the founders.

They camouflaged their purpose with illegible machine operations, moved at extreme velocities, sheltered secretive corporate practices, mastered rhetorical misdirection, taught helplessness, purposefully misappropriated cultural signs and symbols associated with the themes of the second modernity—empowerment, participation, voice, individualization, collaboration—and baldly appealed to the frustrations of second-modernity individuals thwarted in the collision between psychological yearning and institutional indifference. In this process the pioneer surveillance capitalists at Google and Facebook evaded the disciplines of corporate governance and rejected the disciplines of democracy, protecting their claims with financial influence and political relationships. Finally, they benefited from history, born in a time when regulation was equated with tyranny and the state of exception precipitated by the terrorist attacks of 9/11 produced surveillance exceptionalism, further enabling the new market to root and flourish. Surveillance capitalists’ purposeful strategies and accidental gifts produced a form that can romance and beguile but is also ruthlessly efficient at extinguishing space for democratic deliberation, social debate, individual self-determination, and the right to combat as it forecloses every path to exit.


pages: 258 words: 63,367

Making the Future: The Unipolar Imperial Moment by Noam Chomsky

"Robert Solow", 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, Nelson Mandela, 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: 254 words: 61,387

This Could Be Our Future: A Manifesto for a More Generous World by Yancey Strickler

basic income, big-box store, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, cognitive dissonance, corporate governance, Daniel Kahneman / Amos Tversky, David Graeber, Donald Trump, Doomsday Clock, effective altruism, Elon Musk, financial independence, gender pay gap, global supply chain, housing crisis, Ignaz Semmelweis: hand washing, invention of the printing press, invisible hand, Jeff Bezos, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Nash: game theory, Joi Ito, Joseph Schumpeter, Kickstarter, Louis Pasteur, Mark Zuckerberg, medical bankruptcy, new economy, Oculus Rift, off grid, offshore financial centre, Ralph Nader, RAND corporation, Richard Thaler, Ronald Reagan, self-driving car, shareholder value, Silicon Valley, Simon Kuznets, Snapchat, Social Responsibility of Business Is to Increase Its Profits, stem cell, Steve Jobs, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Travis Kalanick, universal basic income, white flight

So when the group made a significant shift in how they defined a company’s responsibilities during the 1980s and 1990s, this mattered. National Medal of Science–winning mathematician Ralph Gomory observes: “In 1981, the Business Roundtable wrote in its Statement on Corporate Responsibility that companies should always consider the effects their actions have on a number of groups including their shareholders, their communities, their employees, and society at large. But by 1997, their Statement on Corporate Governance discussed only how they could best serve their shareholders.” Employees, communities, and society at large were no longer a priority. Only shareholders were. The hyperfocus on financial maximization took off with Milton Friedman’s argument for the virtue of profits, and grew as Wall Street and others normalized these expectations. As the economist Mariana Mazzucato writes, “The return on financial sector investment sets a minimum for the return on ‘real’ fixed investment, a floor which rises as financial operations become more portable.

The site supports the creative community, provides resources and educational material for creative people, and elevates the work of artists and creators. These are values that Kickstarter is committed to growing, and The Creative Independent supports with distinction. The Creative Independent—or other similarly focused projects Kickstarter may develop in the future—doesn’t need to make money to make value. PATAGONIA, TESLA, AND FUTURE US Few companies are more radical in their approach to corporate governance than the clothing maker Patagonia. Patagonia offers free in-office child care (since 1983), promises lifetime repairs for its clothing (one of its facilities repairs thirty thousand pieces a year), and treats its employees as fellow human beings (as the title of founder Yvon Chouinard’s remarkable book, Let My People Go Surfing, suggests). Patagonia does all of this and more while being a profitable, successful, and beloved business.

“our own worst enemies”: As reported in the Wall Street Journal (“Recycling, Once Embraced by Businesses and Environmentalists, Now Under Siege,” May 13, 2018) the case for financial maximization: Milton Friedman’s New York Times essay was titled “The Social Responsibility of Business Is to Increase Its Profits,” published on September 13, 1970. single goal: to maximize profitability: Background on what I call the Maximizing Class comes from several sources. Most important is analysis by economists William Lazonick and Mary O’Sullivan. In a paper called “Maximizing Shareholder Value: A New Ideology for Corporate Governance,” published in the journal Economy and Society in 2010, Lazonick and O’Sullivan detail the history of what I call financial maximization. Their research finds that before the early 1970s when this new idea emerged, companies followed a “retain and reinvest” model, where profits were turned into additional services, products, pay raises, and training for employees. Starting in the 1970s, however, companies shifted to a strategy called “downsize and divest,” where the strategy changed to smaller workforces and larger executive and shareholder bonuses.


pages: 496 words: 131,938

The Future Is Asian by Parag Khanna

3D printing, Admiral Zheng, affirmative action, Airbnb, Amazon Web Services, anti-communist, Asian financial crisis, asset-backed security, augmented reality, autonomous vehicles, Ayatollah Khomeini, barriers to entry, Basel III, blockchain, Boycotts of Israel, Branko Milanovic, British Empire, call centre, capital controls, carbon footprint, cashless society, clean water, cloud computing, colonial rule, computer vision, connected car, corporate governance, crony capitalism, currency peg, deindustrialization, Deng Xiaoping, Dissolution of the Soviet Union, Donald Trump, energy security, European colonialism, factory automation, failed state, falling living standards, family office, fixed income, flex fuel, gig economy, global reserve currency, global supply chain, haute couture, haute cuisine, illegal immigration, income inequality, industrial robot, informal economy, Internet of things, Kevin Kelly, Kickstarter, knowledge worker, light touch regulation, low cost airline, low cost carrier, low skilled workers, Lyft, Malacca Straits, Mark Zuckerberg, megacity, Mikhail Gorbachev, money market fund, Monroe Doctrine, mortgage debt, natural language processing, Netflix Prize, new economy, off grid, oil shale / tar sands, open economy, Parag Khanna, payday loans, Pearl River Delta, prediction markets, purchasing power parity, race to the bottom, RAND corporation, rent-seeking, reserve currency, ride hailing / ride sharing, Ronald Reagan, Scramble for Africa, self-driving car, Silicon Valley, smart cities, South China Sea, sovereign wealth fund, special economic zone, stem cell, Steve Jobs, Steven Pinker, supply-chain management, sustainable-tourism, trade liberalization, trade route, transaction costs, Travis Kalanick, uber lyft, upwardly mobile, urban planning, Washington Consensus, working-age population, Yom Kippur War

In South Korea, Samsung heir Lee Jae-yong was convicted and jailed in 2017 for making donations in exchange for merger approval, while president Park Geun-hye was impeached that same year and then convicted in 2018 on corruption charges and sentenced to twenty-four years in prison. Across ASEAN—most recently in Thailand and Malaysia—leaders have been sacking ministers for taking kickbacks, independent anticorruption investigative divisions are being allocated more resources, and corporate governance scorecards are being released to the public. India’s prime minister Modi has cracked down on fuzzy accounting and offshore shell companies, while in Pakistan, the Panama Papers revelations forced Pakistan’s prime minister, Nawaz Sharif, to resign in 2017. As Asia gradually evolves from economies based on relationships to ones governed by rules and institutions, authorities will continue to steer markets toward national development.

Recent rating downgrades have spurred a necessary restructuring across Asian markets while also suppressing stock prices and price-to-earnings multiples, creating attractive buying opportunities. Across Asia, stock exchanges that have had only basic listings are now offering far more attractive public equities in telecoms, banks, real estate, technology, and other sectors. They also increasingly demand rigorous reporting on corporate governance, more independent directors, and compliance with environmental and social standards. Both shareholder and stakeholder interests are being taken into account. Shifting toward flexible currency exchange rates has given Asian governments more room to maneuver and made their markets more attractive. Weaker economies used to try to control their currency value like a game of Monopoly in which the cash can’t be used on any other board.

India, Thailand, and the Philippines are privatizing everything from airlines to dairies to casinos to raise capital and stimulate commercial activity in industrial and services sectors. As in China, India’s very high levels of corporate debt (both financial and nonfinancial) are forcing the government to relax foreign investment regulations and accelerate privatization, which together should lead to better corporate governance. India is also reforming outdated policies such as bankruptcy laws by setting a timeline for liquidating failed companies so the private sector can restructure without government delays or devoting resources to unnecessary bailouts. Even in state-capitalist systems such as China, Russia, and Vietnam, inefficient state-owned companies are being restructured to list shares for investors and be more independently run.


pages: 462 words: 129,022

People, Power, and Profits: Progressive Capitalism for an Age of Discontent by Joseph E. Stiglitz

"Robert Solow", affirmative action, Affordable Care Act / Obamacare, barriers to entry, basic income, battle of ideas, Berlin Wall, Bernie Madoff, Bernie Sanders, business cycle, Capital in the Twenty-First Century by Thomas Piketty, carried interest, central bank independence, clean water, collective bargaining, corporate governance, corporate social responsibility, creative destruction, Credit Default Swap, crony capitalism, deglobalization, deindustrialization, disintermediation, diversified portfolio, Donald Trump, Edward Snowden, Elon Musk, Erik Brynjolfsson, Fall of the Berlin Wall, financial deregulation, financial innovation, financial intermediation, Firefox, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, George Akerlof, gig economy, global supply chain, greed is good, income inequality, information asymmetry, invisible hand, Isaac Newton, Jean Tirole, Jeff Bezos, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John von Neumann, Joseph Schumpeter, labor-force participation, late fees, low skilled workers, Mark Zuckerberg, market fundamentalism, mass incarceration, meta analysis, meta-analysis, minimum wage unemployment, moral hazard, new economy, New Urbanism, obamacare, patent troll, Paul Samuelson, pension reform, Peter Thiel, postindustrial economy, price discrimination, principal–agent problem, profit maximization, purchasing power parity, race to the bottom, Ralph Nader, rent-seeking, Richard Thaler, Robert Bork, Robert Gordon, Robert Mercer, Robert Shiller, Robert Shiller, Ronald Reagan, secular stagnation, self-driving car, shareholder value, Shoshana Zuboff, Silicon Valley, Simon Kuznets, South China Sea, sovereign wealth fund, speech recognition, Steve Jobs, The Chicago School, The Future of Employment, The Great Moderation, the market place, The Rise and Fall of American Growth, the scientific method, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, trickle-down economics, two-sided market, universal basic income, Unsafe at Any Speed, Upton Sinclair, uranium enrichment, War on Poverty, working-age population

Inequities are created in the very process by which incomes get generated, as firms exercise monopoly and monopsony power or as they exploit others (as described in earlier chapters) or as they discriminate against the vulnerable or those of particular races or ethnic groups. Inequality is also created when CEOs take advantage of deficiencies in corporate governance to pay themselves exorbitant salaries, leaving less to pay workers or to invest in the firm. Prohibiting these practices, reforming corporate governance laws, passing better labor laws, strengthening and enforcing discrimination and competition laws—all of these are easy steps (politics aside) in creating a fairer distribution of income. As we’ve said, markets don’t exist in a vacuum; they have to be structured, through rules, regulations and policies. Some countries have done a better job in structuring them, leading to greater efficiency and equality in market incomes.

But two centuries of research have now brought us to a better understanding of why Adam Smith’s invisible hand can’t be seen: because it’s not there.88 More often than not, firms’ incentives are to create market power, not just better products—and we’ve seen that American firms have excelled in doing so. They’ve used this market power to exploit their consumers, their workers, and the political system, in ways that have resulted in lower growth, even in a supposedly innovative economy. Even worse, this growth benefits only a fraction of the country. Indeed, our corporate leaders have even figured out how to exploit their own shareholders, taking advantage of deficiencies in our rules of corporate governance to pay themselves outsized compensation.89 Our economy has changed a great deal since our antitrust laws were first introduced and even since the Chicago School interpretations came to prevail; our understanding of economics has changed too; and today we can better grasp the failures of the existing legal framework. But the underlying political and economic concerns about power and exploitation that drove the original legislation are still present—even more so.

See Furman and Orszag, “A Firm-Level Perspective on the Role of Rents in the Rise in Inequality”; and Furman and Orszag, “Slower Productivity and Higher Inequality: Are They Related?” Gutierrez and Philippon (2017) similarly find that investment in the US today is weak relative to measures of profitability and valuation, and find that lack of competition and short-termism, related to the corporate governance problems discussed briefly below, are the two key explanations. See Germán Gutiérrez and Thomas Philippon, “Investment-less Growth: An Empirical Investigation,” Sept. 2017, New York University and Brookings, https://www.brookings.edu/wp-content/uploads/2017/09/2_gutierrezphilippon.pdf. The weakness in investment also, of course, has an adverse effect on aggregate demand, of critical importance in periods such as that after the 2008 financial crisis where lack of aggregate demand is the critical constraint in the economy.


pages: 461 words: 128,421

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

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, business cycle, buy and hold, 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, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, statistical model, stocks for the long run, 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: 471 words: 127,852

Londongrad: From Russia With Cash; The Inside Story of the Oligarchs by Mark Hollingsworth, Stewart Lansley

Berlin Wall, Big bang: deregulation of the City of London, Bob Geldof, business intelligence, corporate governance, corporate raider, credit crunch, crony capitalism, Donald Trump, energy security, Etonian, F. W. de Klerk, income inequality, kremlinology, mass immigration, mega-rich, Mikhail Gorbachev, offshore financial centre, paper trading, plutocrats, Plutocrats, Plutonomy: Buying Luxury, Explaining Global Imbalances, rent-seeking, Ronald Reagan, Skype, Sloane Ranger

‘It is like taking chips off the table,’ said one investment banker. The way in which the City has courted controversial oligarch clients has been a highly contentious subject in the UK. As Bill Browder, once one of the West’s biggest investors in Russia, warned, ‘There are lots of corporate governance skeletons in the cupboard of all the Russian companies listed in London.’34 In 2006, despite investing more in Russia through his £4 billion Hermitage Fund than any other fund manager, Browder had his own visa to Russia withdrawn during a trip to Moscow. He had long attacked Russia’s murky corporate governance and accused state companies such as the energy giant Gazprom of ‘asset stripping’ and fraud. Although Tony Blair took up his case with the Russian authorities, the ban remains. The most controversial flotation was Rosneft. The state-owned oil company raised £5.6 billion in London in July 2006 after the High Court overruled an attempt by Yukos to claim that Rosneft’s public listing would amount to the ‘laundering’ of illegally acquired assets.

With APCO’s help, the foundation recruited powerful figures as trustees, notably Henry Kissinger, Dr Mikhail Piotrovsky, Director of the St Petersburg’s fabled State Hermitage Museum, and Lord (Jacob) Rothschild. The multi-millionaire scion of the banking dynasty, Lord Rothschild is a close friend of Prince Charles and one of the best-connected bankers in the world. Khodorkovsky first met him in the 1990s when he was invited to a party at his country home at Waddesdon Manor, Buckinghamshire. Unsure about navigating his way through Western corporate governance waters, Lord Rothschild became a confidant of Khor-dorkovsky’s and allowed his offices in St James’s to be used as the London address of the Open Russia Foundation. He was so trusted that he was assigned the voting rights behind Khodorkovsky’s Yukos shares in 2003. That meant that the veteran banker could vote at board meetings and AGMs as a surrogate for the oligarch in his absence. Henry Kissinger was also an admirer and even travelled to Moscow to support a joint project with the foundation to promote ‘Russian democracy’.

Matters intensified yet more when the Russian government claimed, as part of its ongoing investigations, that the Yukos restructuring was illegal. Curtis’s response was that it may have been Byzantine, opaque, complicated, secretive, and offshore but it was perfectly legal. ‘I worked closely with Stephen,’ said one banker, ‘and he was scrupulous about not doing anything illegal. It may not have been transparent and good for corporate governance and minority investors, but it was not criminal.’ Fearing that he was a target for prosecution and investigation, Curtis increased his physical security. He could not resign because he was a shareholder and a trustee of the shares, but he could protect himself and his family. Security had always been tight. Now it was paramount. Curtis already ‘owned’ a private security company, ISC Global.


pages: 432 words: 127,985

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

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: 330 words: 99,044

Reimagining Capitalism in a World on Fire by Rebecca Henderson

Airbnb, asset allocation, Berlin Wall, Bernie Sanders, business climate, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, collaborative economy, collective bargaining, commoditize, corporate governance, corporate social responsibility, crony capitalism, dark matter, decarbonisation, disruptive innovation, double entry bookkeeping, Elon Musk, Erik Brynjolfsson, Exxon Valdez, Fall of the Berlin Wall, family office, fixed income, George Akerlof, Gini coefficient, global supply chain, greed is good, Hans Rosling, Howard Zinn, Hyman Minsky, income inequality, index fund, Intergovernmental Panel on Climate Change (IPCC), joint-stock company, Kickstarter, Lyft, Mark Zuckerberg, means of production, meta analysis, meta-analysis, microcredit, mittelstand, Mont Pelerin Society, Nelson Mandela, passive investing, Paul Samuelson, Philip Mirowski, profit maximization, race to the bottom, ride hailing / ride sharing, Ronald Reagan, Rosa Parks, Second Machine Age, shareholder value, sharing economy, Silicon Valley, Snapchat, sovereign wealth fund, Steven Pinker, stocks for the long run, Tim Cook: Apple, total factor productivity, Toyota Production System, uber lyft, urban planning, Washington Consensus, working-age population, Zipcar

Consumer- and employee-owned firms are much more likely to be comfortable improving consumer and employee welfare at the expense of capital returns than conventional investors. Learning to mobilize these alternative sources of capital at scale could have powerfully catalytic effects. Another option is to reduce the power of investors—to give managers shelter from the relentless demands of the capital markets by changing corporate governance, or the rules that specify who controls the firm. This is a tricky but exciting line of inquiry. The widespread adoption of corporate forms like the benefit corporation, could have profoundly beneficial effects—but could also have unanticipated consequences and would probably be widely resisted by today’s investors. Rewiring finance along these lines will be a critical step toward reimagining capitalism.

Informally, he stressed the consistency of an approach to investment rooted in environmental and social performance with long-standing Japanese cultural values, remarking, “My grandmother would have been very upset if I told her that, in my position or my job, thinking about the global environment or social issues was against my professional mandate. She would tell me to quit my job immediately.” There were several reasons to believe that pushing firms to focus on environmental, social, and governance issues would improve the performance of the Japanese economy. Focusing on improving corporate governance—the “G” in ESG—seemed like the obvious place to begin. There is widespread agreement that one of the reasons Japanese firms have generated significantly lower returns than their foreign competitors over the last twenty years is that Japanese corporate boards are relatively weak by global standards. Many Japanese managers are so secure in their positions that they feel no pressure to exit underperforming businesses or to explore new opportunities.

But over the same period, the Japanese economy barely budged.90 It is still the fourth-largest economy in the world—roughly the size of the British and French economies combined—but Japanese rates of productivity growth are roughly half of those in the United States and Europe, and the economy has been essentially stagnant for twenty years, a period that has become known variously as “the lost decade” or the “lost twenty years.”91 The question of just what caused this slowdown remains hotly contested, with explanations ranging from a growing demographic crisis and the toleration of gross inefficiency in some highly protected sectors of the economy to the combination of a massive asset bubble and a failure to hold Japanese banks accountable for its consequences. But many Japanese observers believe it also reflects the failure of Japan’s system of corporate governance—that the very features that enabled Japanese firms to focus on the long term with such success in the sixties, seventies, and eighties are now a major liability. Japanese managers remain firmly in control at most Japanese companies, and as a result Japanese firms are relatively slow to exit underperforming businesses and/or explore new opportunities.92 Giving managers significant control over their firms is a high-variance bet.


pages: 224 words: 13,238

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

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: 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 cycle, 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, disruptive innovation, Donald Trump, family office, financial innovation, Frederick Winslow Taylor, full employment, George Gilder, glass ceiling, global pandemic, Gordon Gekko, hiring and firing, income inequality, invisible hand, Jeff Bezos, job-hopping, John von Neumann, Joseph Schumpeter, Kenneth Arrow, Kickstarter, 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, Sam Altman, Sand Hill Road, Saturday Night Live, shareholder value, Silicon Valley, Skype, Social Responsibility of Business Is to Increase Its Profits, 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.


Saudi America: The Truth About Fracking and How It's Changing the World by Bethany McLean

addicted to oil, American energy revolution, Asian financial crisis, buy and hold, corporate governance, delayed gratification, Donald Trump, family office, hydraulic fracturing, Jeff Bezos, Mark Zuckerberg, Masdar, oil shale / tar sands, peak oil, Silicon Valley, sovereign wealth fund, Upton Sinclair, Yom Kippur War

And Chesapeake board members also were allowed personal use of Chesapeake planes. “I have never seen a more shameful document than the Chesapeake proxy statement,” Jeffrey Bronchick, a longtime portfolio manager who runs a firm called Cove Capital, wrote in a letter to Chesapeake’s board. “If I could reduce it to one page, I would frame and hang it on your office wall as a near perfect illustration of the complete collapse of appropriate corporate governance.” Underlying all of McClendon’s enterprises was a vast and tangled web of debt. That 2.5 percent stake in the profits from Chesapeake’s wells that McClendon and Ward had kept for themselves at the IPO had come with a hitch: McClendon had to pay his share of the costs to drill the wells. Over time, according to a series of investigative pieces done by Reuters, he quietly borrowed over $1.5 billion from various banks and private equity firms, using the well interests as collateral.

Icahn, according to someone familiar with events, initially thought he could control McClendon’s most reckless impulses, especially with McClendon no longer serving as both CEO and chairman, but began to realize it was futile. Lou Simpson, who had run Geico’s investment portfolio for Warren Buffett for decades, and who had joined the board in 2011, was also furious at the state of affairs, according to someone close to events. In remarks in front of a small group, he later talked about McClendon’s “recklessness” and called Chesapeake “one of the worst corporate governance cases” he’d ever seen. In January 2013, McClendon and Chesapeake announced that McClendon would retire on April 1, 2013—April Fool’s Day. Robert Lawler, the longtime oil and gas executive who took over as Chesapeake’s president and CEO in June 2013, later told a crowd at the Houston Producer’s Forum luncheon that he felt like Ernest Shackleton, the British explorer who led expeditions to Antarctica in the 1900s.


pages: 120 words: 33,892

The Acquirer's Multiple: How the Billionaire Contrarians of Deep Value Beat the Market by Tobias E. Carlisle

activist fund / activist shareholder / activist investor, business cycle, cognitive dissonance, corporate governance, corporate raider, Jeff Bezos, Paul Graham, Peter Thiel, Richard Thaler, shareholder value, Tim Cook: Apple

But here’s the twist: fair companies at wonderful prices do even better. In this book, I show how to find those fair companies at wonderful prices. And I explain in plain and simple terms why they beat Buffett’s wonderful companies at fair prices. We wrote about the test in 2012 and again in my 2014 book, Deep Value. It did well for an expensive, quasi-academic textbook on valuation and corporate governance. But I wanted one that could be read by non-professional investors. This book is intended to be a pocket field-guide to fair companies at wonderful prices. Its mission is to help spread the contrarian message. It’s a collection of the best ideas from my books Deep Value, Quantitative Value, and Concentrated Investing. In this book, the ideas in those are simplified, summarized, and expanded.

He is a coauthor of Concentrated Investing: Strategies of the World’s Greatest Concentrated Value Investors (2016, Wiley Finance) and Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (2012, Wiley Finance). His books have been translated into five languages. Tobias also runs the websites AcquirersMultiple.com—home of The Acquirer’s Multiple stock screeners—and Greenbackd.com. His Twitter handle is @greenbackd. He has broad experience in investment management, business valuation, corporate governance, and corporate law. Before founding the precursor to Carbon Beach in 2010, Tobias was an analyst at an activist hedge fund, general counsel of a company listed on the Australian Stock Exchange, and a corporate advisory lawyer. As a lawyer specializing in mergers and acquisitions, he has advised on deals across a range of industries in the United States, the United Kingdom, China, Australia, Singapore, Bermuda, Papua New Guinea, New Zealand, and Guam.


pages: 349 words: 104,796

Greed and Glory on Wall Street: The Fall of the House of Lehman by Ken Auletta

business climate, corporate governance, financial independence, fixed income, floating exchange rates, interest rate swap, New Journalism, profit motive, Ronald Reagan, Saturday Night Live, traveling salesman, zero-coupon bond

Board members now defend their passivity by saying that they were merely complying with Peterson’s wishes, affirming a fait accompli. “It was a trade that had been done, and we were there to bless it,” explains William Welsh. Nevertheless, he concedes, board members feared retribution: “Those who rebelled might be remembered.” One person close to Peterson put it less gently: “It’s a dirty little secret down there that a crime was committed in terms of corporate governance. Why permit Glucksman to do it? It was greed.” The directors, this argument runs, were preoccupied with their bonuses and their shares, which were decided every September. “Because compensation at the firm has always been set by the top two executives,” explains one partner, “a guy can throw you a tip of a half-million dollars! The chief executive is the Ayatollah.” The CEO can sway the appointment or removal of partners from their perches on the board or a key committee, and is the major voice in the selection of division heads, in granting a partner special status at the firm, or in anointing new partners.

The number of shares given Finkelson particularly galled people at the firm, since a new partner—like Dawkins—usually started with just 500 shares, rising gradually to average about 1,300 shares; only about a fifth of the seventy-seven partners had 2,000 shares or more. In a partnership, in which all the partners own a piece of the firm, the awarding of shares is supposed to be consensual. While partners stewed over their new chief executive officer’s management techniques and personality, and the board fretted that Glucksman ignored the rules and etiquette of corporate governance, nothing so focused the attention of the firm as the annual September decisions regarding bonuses and stock. To Lehman partners, these ranked as the most fateful decisions made each year. * Lipper sought, and lost, the Democratic nomination for New York City Council President in September 1985. *The New Yorker, September 8 and September 15, 1956. *Several guests confirm this exchange.

.”* Gleacher never thought of bringing the ConAgra matter to Peterson because at the time they were estranged and because ConAgra was interested in expanding its trading operations, which meant that Glucksman was the key to any deal. Gleacher was flabbergasted that Peterson, who was chairman and co-CEO at the time, knew nothing of this. Peterson was mortified, believing that Glucksman and Robin had violated a basic rule of corporate governance by not telling him, and had, perhaps, violated their fiduciary responsibility to their partners as well. Although Peterson (and Glucksman) did not share the events of the previous July with his partners before deciding to leave Lehman, he perceived no irony now in accusing Glucksman and Rubin of violating their responsibility to the partnership. A major difference, Peterson would correctly say, was that at least he took his agreement with Glucksman to the board for their approval, while Glucksman and Rubin did not take the ConAgra offer to the board.


pages: 306 words: 78,893

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

"Robert Solow", accounting loophole / creative accounting, affirmative action, Asian financial crisis, barriers to entry, borderless world, Branko Milanovic, Bretton Woods, business cycle, 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, post-work, 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, 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

affirmative action, Affordable Care Act / Obamacare, barriers to entry, basic income, business cycle, 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.


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Street Fighters: The Last 72 Hours of Bear Stearns, the Toughest Firm on Wall Street by Kate Kelly

bank run, buy and hold, collateralized debt obligation, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Donald Trump, fixed income, housing crisis, index arbitrage, Long Term Capital Management, margin call, moral hazard, quantitative hedge fund, Renaissance Technologies, risk-adjusted returns, shareholder value, technology bubble, too big to fail, traveling salesman

“It became a dictatorship as opposed to a corporation,” he recalls.10 Shortly after Cayne took the chairman position, Glickman was removed from his longtime role as chairman of the audit committee. Two years later, when a raft of corporate-governance reforms were sparking many companies to name external board members to the position of “lead” director to encourage more independent thinking, Glickman figured that as the nonmanagement director with the longest tenure at the company, he was the man for the job. Over cigars one day, he decided to broach the topic with Cayne, who was distracted by a special blade Glickman was using to snip his cigar for flavor enhancement. “I want one of those,” Cayne mused aloud. “We’ve got to name a lead director,” said Glickman. He, like many executives, had been watching the kerfuffle at the NYSE with a leery eye. Its chairman and CEO, Dick Grasso, was being raked over the coals by corporate-governance experts for packing his board with pals and beholden brokerage-industry leaders who had granted him nearly $200 million in compensation.

Paulson’s discussions with Butenhoff, Kurt C-1 risk Cadwalader, Wickersham & Taft Cantor Fitzgerald capital accumulation plan (CAP) Carlyle Capital Corporation Carlyle Group CASH (Corporate America’s Six Honchos) Cayne, Jimmy absences of background of bankruptcy preferred by bridge playing of as CEO as chairman compensation of golf playing of Greenberg’s relationship with management style of marijuana use of mystique of removal of Spector’s love-hate relationship with Wall Street Journal criticism of Cayne, Patricia Denner CDOs CFOs, Schwartz’s sourcing of charity Chase Manhattan Corporation Childs, David China Cioffi, Ralph Citadel Investment Group Citicorp CITIC Securities International Citigroup Clinton, Bill Clinton, Hillary CNBC CNN Cohen, Rodgin (“Rodge”) deal papers and Fed deadline and Cohn, Gary Colby, Bob collateral held by J.P. Morgan Comcast Commercial Credit Congress, U.S. Conseco Continental Illinois National Bank and Trust Company corporate-governance reforms Corzine, Jon Countrywide Financial Cox, Christopher credit line of Credit-Anstalt credit-default swaps Credit Suisse Group crown jewels provision Cuomo, Andrew Cutler, Steve DBRS de Monchaux, Wendy derivatives market Deutsche Bank Diller, Barry Dimon, Jamie acquisition deal turned down by background of deal price and Geithner’s talks with misbehavior of Schwartz’s calls with Dimon, Judy Dimon, Panos Dimon, Theodore Disney Dolan family Dow Jones Industrial Average Drexel Burnham Lambert Dreyfus Eichner, Matt Enron equity, return on E*TRADE Faber, David Fannie Mae Federal Deposit Insurance Corporation Federal Reserve Bear deal price and Bear loan from board of conference call of deadline delivered by discount window of J.C.


pages: 302 words: 82,233

Beautiful security by Andy Oram, John Viega

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, MITM: man-in-the-middle, 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, 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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Six Degrees: The Science of a Connected Age by Duncan J. Watts

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, MITM: man-in-the-middle, Murray Gell-Mann, Network effects, new economy, Norbert Wiener, Paul Erdős, peer-to-peer, rolodex, Ronald Coase, scientific worldview, 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: 701 words: 199,010

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

affirmative action, asset-backed security, automated trading system, bank run, banking crisis, Basel III, Bernie Madoff, Black-Scholes formula, business cycle, 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, Kickstarter, 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, Mitch Kapor, 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, Sam Peltzman, 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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Money Changes Everything: How Finance Made Civilization Possible by William N. Goetzmann

Albert Einstein, Andrei Shleifer, asset allocation, asset-backed security, banking crisis, Benoit Mandelbrot, Black Swan, Black-Scholes formula, Bretton Woods, Brownian motion, business cycle, 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, 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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Meltdown: How Greed and Corruption Shattered Our Financial System and How We Can Recover by Katrina Vanden Heuvel, William Greider

Asian financial crisis, banking crisis, Bretton Woods, business cycle, buy and hold, 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.


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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

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.


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Big Business: A Love Letter to an American Anti-Hero by Tyler Cowen

23andMe, Affordable Care Act / Obamacare, augmented reality, barriers to entry, Bernie Sanders, bitcoin, blockchain, Bretton Woods, cloud computing, cognitive dissonance, corporate governance, corporate social responsibility, correlation coefficient, creative destruction, crony capitalism, cryptocurrency, dark matter, David Brooks, David Graeber, don't be evil, Donald Trump, Elon Musk, employer provided health coverage, experimental economics, Filter Bubble, financial innovation, financial intermediation, global reserve currency, global supply chain, Google Glasses, income inequality, Internet of things, invisible hand, Jeff Bezos, late fees, Mark Zuckerberg, mobile money, money market fund, mortgage debt, Network effects, new economy, Nicholas Carr, obamacare, offshore financial centre, passive investing, payday loans, peer-to-peer lending, Peter Thiel, pre–internet, price discrimination, profit maximization, profit motive, RAND corporation, rent-seeking, reserve currency, ride hailing / ride sharing, risk tolerance, Ronald Coase, shareholder value, Silicon Valley, Silicon Valley startup, Skype, Snapchat, Social Responsibility of Business Is to Increase Its Profits, Steve Jobs, The Nature of the Firm, Tim Cook: Apple, too big to fail, transaction costs, Tyler Cowen: Great Stagnation, ultimatum game, WikiLeaks, women in the workforce, World Values Survey, Y Combinator

The scarcity of top-rate candidates sometimes causes corporate boards to make or stick with hiring mistakes, but overall the process has worked pretty well in allocating talent to important jobs and keeping that talent motivated. In other words, when it comes to CEO pay we can (mostly) trust business.3 The efforts of America’s highest-earning 1 percent have been one of the more dynamic elements of the global economy. There’s plenty of evidence that American CEOs are the best in the world for supporting productivity gains, and they work with tougher and better corporate governance than ever before. They have integrated tech into their organizations at a world-beating pace, making them more competitive and thus producing better wages for their employees. Economists sometimes speak of CEOs as arbitrary beneficiaries of a variable called “skill-biased technical change.” That phrase refers to new technologies that boost the return to skilled labor. For instance, email and smartphones allow for easier management of global supply chains at a distance, and that in turn increases the influence and eventually the compensation of many of the best managers in multinational enterprises.

(That’s not counting endorsement income.) Once more, these high returns are representing some very general features of the American economy, and not the ability of the athletes or CEOs to systematically defraud either consumers or the system more generally.16 The idea that high CEO pay is mainly about ripping people off—or extracting rents, as economists put it—also doesn’t explain history very well. By most measures, corporate governance has become a lot tighter and more rigorous since the 1970s. The 1950s and 1960s were much more of a “good ol’ boy” era in corporations, as you see reflected in such TV shows as Mad Men. Yet it was during this period of weak governance that CEO pay was relatively low, while during the more recent periods of stronger governance CEO pay has been high and rising. That suggests it is in the broader corporate interest to recruit top candidates for increasingly tough jobs.

Kaplan, Greg, Kurt Mitman, and Giovanni L. Violante. 2017. “The Housing Boom and Bust: Model Meets Evidence.” NBER Working Paper No. 23694. National Bureau of Economic Research, Washington, DC. Kaplan, Greg, and Sam Schulhofer-Wohl. 2018. “The Changing (Dis-)Utility of Work.” NBER Working Paper No. 24738. National Bureau of Economic Research, Washington, DC. Kaplan, Steven N. 2012. “Executive Compensation and Corporate Governance in the U.S.: Perceptions, Facts and Challenges.” NBER Working Paper No. 18395. National Bureau of Economic Research, Washington, DC. Kaplan, Steven N., Mark M. Klebanov, and Morten Sorensen. 2012. “Which CEO Characteristics and Abilities Matter?” Journal of Finance 67, no. 3 (June): 973–1007. Kaplan, Steven N., and Josh Lerner. 2010. “It Ain’t Broke: The Past, Present, and Future of Venture Capital.”


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More Than You Know: Finding Financial Wisdom in Unconventional Places (Updated and Expanded) by Michael J. Mauboussin

Albert Einstein, Andrei Shleifer, Atul Gawande, availability heuristic, beat the dealer, Benoit Mandelbrot, Black Swan, Brownian motion, butter production in bangladesh, buy and hold, capital asset pricing model, Clayton Christensen, clockwork universe, complexity theory, corporate governance, creative destruction, Daniel Kahneman / Amos Tversky, deliberate practice, demographic transition, discounted cash flows, disruptive innovation, diversification, diversified portfolio, dogs of the Dow, Drosophila, Edward Thorp, en.wikipedia.org, equity premium, Eugene Fama: efficient market hypothesis, fixed income, framing effect, functional fixedness, hindsight bias, hiring and firing, Howard Rheingold, index fund, information asymmetry, intangible asset, invisible hand, Isaac Newton, Jeff Bezos, Kenneth Arrow, Laplace demon, Long Term Capital Management, loss aversion, mandelbrot fractal, margin call, market bubble, Menlo Park, mental accounting, Milgram experiment, Murray Gell-Mann, Nash equilibrium, new economy, Paul Samuelson, Pierre-Simon Laplace, quantitative trading / quantitative finance, random walk, Richard Florida, Richard Thaler, Robert Shiller, Robert Shiller, shareholder value, statistical model, Steven Pinker, stocks for the long run, survivorship bias, The Wisdom of Crowds, transaction costs, traveling salesman, value at risk, wealth creators, women in the workforce, zero-sum game

Too often companies seek to promote executives with the “right stuff”—good communication skills, smarts, and success in a specific context—without full consideration of their actual work skills and experience. As a result, these companies misallocate human capital, with poor results for both the business and the executive. The Bottom Line Assessing management’s leadership, incentives, and capital allocation discipline is essential for long-term shareholders. Despite a heightened focus on corporate governance, few boards are sufficiently proactive to appropriately address these areas. I’ve attempted to give some guidelines in thinking through some of the issues. Part 2 Psychology of Investing INTRODUCTION Cigar-chomping Puggy Pearson was a gambling legend. Born dirt poor and with only an eighth-grade education (“that’s about equivalent to a third grade education today,” he quipped), Pearson amassed an impressive record: he won the World Series of Poker in 1973, was once one of the top ten pool players in the world, and managed to take a golf pro for $7,000—on the links.

This is a difficult question to answer, and markets certainly need an ecology of investors to remain robust. But the aggregate statistics on equity portfolio turnover give any intelligent investor pause. Annual turnover has shot from roughly 30 to 40 percent in the early 1970s to about 90 percent today. This means the average holding period for a stock is now just over one year. Not only is this turnover costly, it has also attended a disquieting decline in corporate governance.6 Visiting El Farol Economist Brian Arthur has made important contributions to our understanding of inductive versus deductive approaches to problem solving (including stock picking). Arthur notes that you can solve only the easiest problems deductively: you can do it for tic-tac-toe but not for chess. Indeed, experiments show that humans aren’t that good at deductive logic. But humans are superb at recognizing and matching patterns.

EXHIBIT 34.2 Top 30 S&P 500 Index Moves, September 2001-March 2007 DatePercent ChangeExplanation 07/24/2002 5.73 Investment community decides market overdue for at least a short-term rally; Congressional agreement on corporate-reform law 07/29/2002 5.41 Sense among investors that stocks have fallen too far 09/17/2001 —4.92 First day of trading following 9/11 10/15/2002 4.73 Better-than-expected corporate profits send stocks surging for fourth straight day 09/03/2002 —4.15 Market declines in Europe and Japan and weak U.S. and European manufacturing numbers; talk of more problems among Japanese banks 08/14/2002 4.00 Money moves from bonds to stocks; relief certification deadline passes, and short covering 10/01/2002 4.00 Positive earnings news; Iraq’s agreement to let U.N. inspectors return, and strong economic news 10/11/2002 3.91 Another surge in Chicago Board Options Exchange volatility and short covering 09/24/2001 3.90 Foreign markets (except Japan) report gains; clear optimism in insurance and energy sectors; reduced fear of terrorism; and short covering 07/19/2002 —3.83 Continuing concern about accounting profits 05/08/2002 3.75 A gentle hint from Cisco Systems about a possible coming business recovery is enough to spark a monster stock rally 07/05/2002 3.67 Short covering 03/17/2003 3.54 News that the White House has dropped its sputtering diplomatic efforts and appears to be preparing for war with Iraq 03/24/2003 —3.52 Fears that the war in Iraq could be longer and more difficult than investors had anticipated 10/10/2002 3.50 Short covering; The Chicago Board Options Exchange’s volatility index pushes above fifty—reflects exaggerated level of investor worry 02/27/2007 —3.47 Concern over high Chinese stock valuations and decision by People’s Bank of China to drain liquidity from banking system cause strong sell off in Chinese market; spills over globally 03/13/2003 3.45 United States expresses a willingness to delay until the following week a vote of using force to disarm Iraq 08/05/2002 —3.43 Weaker-than-expected U.S. employment report 07/10/2002 —3.40 Waning confidence in the market and in corporate integrity 01/02/2003 3.32 Anticipation of increased corporate spending; announcement that Bush’s economic stimulus package will be released the following week 07/22/2002 —3.29 Bush affirms support for Treasury Secretary Paul O’Neill and takes some potshots at Wall Street 08/08/2002 3.27 Fed schedules monetary-policy meeting; IMF $30 billion bailout of Brazil; and Citigroup announces a series of corporate-governance measures 09/27/2002 —3.23 Lack of consumer confidence and negative earnings news 09/20/2001 —3.11 Political and economic uncertainty 09/19/2002 —3.01 Bad corporate news and housing construction falls for third straight month 08/06/2002 2.99 Anticipation of interest-rate cut 08/01/2002 —2.96 Report shows slowed manufacturing growth; unemployment worsening; government revises economic growth rates down 01/24/2003 —2.92 North Korea’s nuclear threat; Mideast instability; the war against terrorism and rising tensions with European allies 06/17/2002 2.87 Bargain hunting in tech sector due to an oversold market 01/29/2002 —2.86 Accounting questions surface at more big companies Source: Wall Street Journal, New York Times, author analysis.


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Finding Alphas: A Quantitative Approach to Building Trading Strategies by Igor Tulchinsky

algorithmic trading, asset allocation, automated trading system, backtesting, barriers to entry, business cycle, buy and hold, capital asset pricing model, constrained optimization, corporate governance, correlation coefficient, credit crunch, Credit Default Swap, discounted cash flows, discrete time, diversification, diversified portfolio, Eugene Fama: efficient market hypothesis, financial intermediation, Flash crash, implied volatility, index arbitrage, index fund, intangible asset, iterative process, Long Term Capital Management, loss aversion, market design, market microstructure, merger arbitrage, natural language processing, passive investing, pattern recognition, performance metric, popular capitalism, prediction markets, price discovery process, profit motive, quantitative trading / quantitative finance, random walk, Renaissance Technologies, risk tolerance, risk-adjusted returns, risk/return, selection bias, sentiment analysis, shareholder value, Sharpe ratio, short selling, Silicon Valley, speech recognition, statistical arbitrage, statistical model, stochastic process, survivorship bias, systematic trading, text mining, transaction costs, Vanguard fund, yield curve

A similar regression analysis for growth stocks was performed by Chan et al. (2001) and Bartov and Mohanram (2004); they found signals that correlated with future returns specifically for growth stocks (stocks with low book-to-market ratios) from 1979 to 1999: •• Net income/total assets > industry median •• Cash flow/total assets > industry median •• Net income variance < industry median •• Gross income variance < industry median •• R&D expenses/total assets > industry median •• Capital expenditure/total assets > industry median •• Advertising expenses/total assets > industry median R&D, capital, and advertising expenses are separate items inside the operating expenses line item of the income statement, as indicated in Table 19.4. Growing companies will build out these areas with expectations of improved future sales. 146 Table 19.4 Finding Alphas The income statement: operating expenses R&D expenses Capital expenses Advertising expenses Other operating expenses Operating expenses D1 D2 D3 D4 D D1 D2 D3 D 4 CORPORATE GOVERNANCE Management monitors and seeks to improve company performance using metrics, and market participants will tend to reward the stock price when they observe improvements in some of these. Metrics positively correlated with future returns, according to Abarbanell and Bushee (1997), are: •• Reduced inventory per unit sales •• Improved accounts receivable per unit sales •• Improved sales minus change in gross margin •• Reduced administrative expenses per unit sales •• Improved tax rate •• Earnings quality – change to the use of FIFO versus LIFO •• Audit qualification – change to qualified auditing •• Sales per employee NEGATIVE FACTORS Some factors are specifically useful for isolating a short portfolio.

Published 2020 by John Wiley & Sons, Ltd. 292Index price effects 190 price targets 184 thought process 186–187 uses of 182–190 annualized Sharpe ratios 97 annual return 35 approximation, to normal distribution 91 APT see arbitrage pricing theory arbitrage capital structure 204–205 index-linked 223–230 index-rebalancing 203–204 mergers 196–199 statistical 10–11, 69–70 arbitrage pricing theory (APT) 95, 157 AsymBoost 125 ATR see average true range automated searches 111–120 backtesting 116–117 batch statistics 117–118 depth 116 diversification 118–119 efficiency 111–113 input data 113–114 intermediate variables 115 manual preparation 119 noise. 113 optimization 112, 115–116 scale 111–113 search spaces 114–116 sensitivity and significance 119 unitless ratios 113–114 automation 269 availability bias 81 average daily trading volume (ADV) 239 average true range (ATR) 136 avoidance of overfitting 74–75, 269–270 axes of triple-axis plan 85–86 back office digitization 8 backtesting 13–14, 69–76 automated searches 116–117 cross-validation 75 drawdowns 107 importance of 70–71 out-of-sample tests 74 overfitting 72–75 samples selection 74–75 simulation 71–72 statistical arbitrage 69–70 WebSim 33–41 backwardation 248 balance sheets 143 band-pass filters 128 batch statistics 117–118 behavioral bias 80–82 behavioral economics 11–12, 46, 138, 155–156, 171–172 BE/ME see book equity to market equity betas see risk factors bias 12, 19, 45, 77–82 analyst reports 190–192 availability 81 behavioral 80–82 confirmation 80–81 conservatism 155–156 data mining 79–80 formulation 80 forward-looking 72 herding 81–82, 190–191 positive 190 selection 117–118 systemic 77–80 variance trade-off 129–130 bid-ask spread 208–212 big data 46–47, 79–80 categorization of news 163 expectedness 164 full text analysis 164 news analysis 159–166 Index293 novelty analysis 161–162 relevance analysis 162 sentiment analysis 160–161 social media 165–166 book equity to market equity (BE/ME) 96, 97–99 bootstrapping 107 business cycle 196 Butterworth filters 128 C++ 12 calibration 12, 13–14 call transcripts 181, 187–188 capacity, exchange-traded funds 234–235 capital asset pricing model (CAPM) 10, 95 capital raising 227–228 capital structure arbitrage 204–205 CAPM see capital asset pricing model carry trade 248 carve-outs 200–202 cash flow statements 144–145, 150–152 categorization, of news 163 cauterization problems 121 CDSs see credit default swaps challenges, exchange-traded funds 239–240 “cigar butt investing” 202–203 clamping 54 classification problems 121 CNNs see convolutional neural networks Commitments of Traders (COT) report 244–245 completion of mergers 199 computer adoption 7–9 confirmation bias 80–81 Confusion of Confusions 7 conglomeration 197 conservatism bias 155–156 construction step-by-step 5 see also design contango 247–248 control of turnover 53–55, 59–60 convolutional neural networks (CNNs) 125–126 corporate governance 146 correlation 28–29, 61–68 of alpha value 66 density distributions 67 generalized 64–66 macroeconomic 153 Pearson coefficients 62–64, 90 pools 66 profit and loss 61–62 Spearman’s rank 90 temporal-based 63–64, 65 costs of carry 247–248 exchange-traded funds 232 of exit 19, 21 of trades 50–52 COT report see Commitments of Traders report covariance 62 see also correlation coverage drop 191–192 credit default swaps (CDSs) 204–205 crossing effect 52–53 cross-validation 75 CRSP U.S.

Shaw & Co. 8 design 25–30 automated searches 111–120 backtesting 33–41 case study 31–41 core concepts 3–6 data inputs 4, 25–26, 43–47 evaluation 28–29 expressions 4 flow chart 41 future performance 29–30 horizons 4–50 intraday alphas 219–221 machine learning 121–126 noise reduction 26 optimization 29–30 prediction frequency 27 quality 5 risk-on/risk off alphas 246–247 robustness 89–93 smoothing 54–55, 59–60 triple-axis plan 83–88 universe 26 value 27–30 digital filters 127–128 digitization 7–9 dimensionality 129–132 disclosures 192 distressed assets 202–203 diversification automated searches 118–119 exchange-traded funds 233 portfolios 83–88, 108 DL see deep learning dot (inner) product 63–64 Dow, Charles 7 DPIN see dynamic measure of the probability of informed trading drawdowns 106–107 dual timestamping 78 dynamic measure of the probability of informed trading (DPIN) 214–215 dynamic parameterization 132 early-exercise premium 174 earnings calls 181, 187–188 earnings estimates 184–185 earnings surprises 185–186 efficiency, automated searches 111–113 Index295 efficient markets hypothesis (EMH) 11, 135 ego 19 elegance of models 75 EMH see efficient markets hypothesis emotions 19 ensemble methods 124–125 ensemble performance 117–118 estimation of risk 102–106 historical 103–106 position-based 102–103 shrinkage 131 ETFs see exchange-traded funds Euclidean space 64–66 evaluation 13–14, 28–29 backtesting 13–14, 33–41, 69–76 bias 77–82 bootstrapping 107 correlation 28–29 cutting losses 20–21 data selection 74–75 drawdowns 107 information ratio 28 margin 28 overfitting 72–75 risk 101–110 robustness 89–93 turnover 49–60 see also validation event-driven strategies 195–205 business cycle 196 capital structure arbitrage 204–205 distressed assets 202–203 index-rebalancing arbitrage 203–204 mergers 196–199 spin-offs, split-offs & carve-outs 200–202 exchange-traded funds (ETFs) 223–240 average daily trading volume 239 challenges 239–240 merits 232–233 momentum alphas 235–237 opportunities 235–238 research 231–240 risks 233–235 seasonality 237–238 see also index alphas exit costs 19, 21 expectedness of news 164 exponential moving averages 54 expressions, simple 4 extreme alpha values 104 extrinsic risk 101, 106, 108–109 factor risk heterogeneity 234 factors financial statements 147 to alphas 148 failure modes 84 fair disclosures 192 fair value of futures 223 Fama–French three-factor model 96 familiarity bias 81 feature extraction 130–131 filters 127–128 finance blogs 181–182 finance portals 180–181, 192 financial statement analysis 141–154 balance sheets 143 basics 142 cash flow statements 144– 145, 150–152 corporate governance 146 factors 147–148 fundamental analysis 149–154 growth 145–146 income statements 144 negative factors 146–147 special considerations 147 finite impulse response (FIR) filters 127–128 296Index FIR filters see finite impulse response filters Fisher Transform 91 five-day reversion alpha 55–59 Float Boost 125 forecasting behavioral economics 11–12 computer adoption 7–9 frequencies 27 horizons 49–50 statistical arbitrage 10–11 UnRule 17–21 see also predictions formation of the industry 8–9 formulation bias 80 forward-looking bias 72 forwards 241–249 checklist 243–244 Commitments of Traders report 244–245 instrument groupings 242–243 seasonality 245–246 underlying assets 241–242 frequencies 27 full text analysis 164 fundamental analysis 149–154 future performance 29–30 futures 241–249 checklist 243–244 Commitments of Traders report 244–245 fair value 223 instrument groupings 242–243 seasonality 245–246 underlying assets 241–242 fuzzy logic 126 General Electric 200 generalized correlation 64–66 groupings, futures and forwards 242–243 group momentum 157–158 growth analysis 145–146 habits, successful 265–271 hard neutralization 108 headlines 164 hedge fund betas see risk factors hedge funds, initial 8–9 hedging 108–109 herding 81–82, 190–191 high-pass filters 128 historical risk measures 103–106 horizons 49–50 horizontal mergers 197 Huber loss function 129 humps 54 hypotheses 4 ideas 85–86 identity matrices 65 IIR filters see infinite impulse response filters illiquidity premium 208–211 implementation core concepts 12–13 triple-axis plan 86–88 inaccuracy of models 10–11 income statements 144 index alphas 223–240 index changes 225–228 new entrants 227–228 principles 223–225 value distortion 228–230 see also exchange-traded funds index-rebalancing arbitrage 203–204 industry formation 8–9 industry-specific factors 188–190 infinite impulse response (IIR) filters 127–128 information ratio (IR) 28, 35–36, 74–75 initial hedge funds 8–9 inner product see dot product inputs, for design 25–26 integer effect 138 intermediate variables 115 Index297 intraday data 207–216 expected returns 211–215 illiquidity premium 208–211 market microstructures 208 probability of informed trading 213–215 intraday trading 217–222 alpha design 219–221 liquidity 218–219 vs. daily trading 218–219 intrinsic risk 102–103, 105–106, 109 invariance 89 inverse exchange-traded funds 234 IR see information ratio iterative searches 115 Jensen’s alpha 3 L1 norm 128–129 L2 norm 128–129 latency 46–47, 128, 155–156 lead-lag effects 158 length of testing 75 Level 1/2 tick data 46 leverage 14–15 leveraged exchange-traded funds 234 limiting methods 92–93 liquidity effect 96 intraday data 208–211 intraday trading 218–219 and spreads 51 literature, as a data source 44 look-ahead bias 78–79 lookback days, WebSim 257–258 looking back see backtesting Lo’s hypothesis 97 losses cutting 17–21, 109 drawdowns 106–107 loss functions 128–129 low-pass filters 128 M&A see mergers and acquisitions MAC clause see material adverse change clause MACD see moving average convergence-divergence machine learning 121–126 deep learning 125–126 ensemble methods 124–125 fuzzy logic 126 look-ahead bias 79 neural networks 124 statistical models 123 supervised/unsupervised 122 support vector machines (SVM) 122, 123–124 macroeconomic correlations 153 manual searches, pre-automation 119 margin 28 market commentary sites 181–182 market effects index changes 225–228 see also price changes market microstructure 207–216 expected returns 211–215 illiquidity premium 208–211 probability of informed trading 213–215 types of 208 material adverse change (MAC) clause 198–199 max drawdown 35 max stock weight, WebSim 257 mean-reversion rule 70 mean-squared error minimization 11 media 159–167 academic research 160 categorization 163 expectedness 164 finance information 181–182, 192 momentum 165 novelty 161–162 298Index sentiment 160–161 social 165–166 mergers and acquisitions (M&A) 196–199 models backtesting 69–76 elegance 75 inaccuracy of 10–11 see also algorithms; design; evaluation; machine learning; optimization momentum alphas 155–158, 165, 235–237 momentum effect 96 momentum-reversion 136–137 morning sunshine 46 moving average convergencedivergence (MACD) 136 multiple hypothesistesting 13, 20–21 narrow framing 81 natural gas reserves 246 negative factors, financial statements 146–147 neocognitron models 126 neural networks (NNs) 124 neutralization 108 WebSim 257 newly indexed companies 227–228 news 159–167 academic research 160 categories 163 expectedness 164 finance information 181–182, 192 momentum 165 novelty 161–162 relevance 162 sentiment 160–161 volatility 164–165 NNs see neural networks noise automated searches 113 differentiation 72–75 reduction 26 nonlinear transformations 64–66 normal distribution, approximation to 91 novelty of news 161–162 open interest 177–178 opportunities 14–15 optimization 29–30 automated searches 112, 115–116 loss functions 128–129 of parameter 131–132 options 169–178 concepts 169 open interest 177–178 popularity 170 trading volume 174–177 volatility skew 171–173 volatility spread 174 option to stock volume ratio (O/S) 174–177 order-driven markets 208 ordering methods 90–92 O/S see option to stock volume ratio outliers 13, 54, 92–93 out-of-sample testing 13, 74 overfitting 72–75 data mining 79–80 reduction 74–75, 269–270 overnight-0 alphas 219–221 overnight-1 alphas 219 parameter minimization 75 parameter optimization 131–132 PCA see principal component analysis Pearson correlation coefficients 62–64, 90 peer pressure 156 percent profitable days 35 performance parameters 85–86 Index299 PH see probability of heuristicdriven trading PIN see probability of informed trading PnL see profit and loss pools see portfolios Popper, Karl 17 popularity of options 170 portfolios correlation 61–62, 66 diversification 83–88, 108 position-based risk measures 102–103 positive bias 190 predictions 4 frequency 27 horizons 49–50 see also forecasting price changes analyst reports 190 behavioral economics 11–12 efficient markets hypothesis 11 expressions 4 index changes 225–228 news effects 159–167 relative 12–13, 26 price targets 184 price-volume strategies 135–139 pride 19 principal component analysis (PCA) 130–131 probability of heuristic-driven trading (PH) 214 probability of informed trading (PIN) 213–215 profit and loss (PnL) correlation 61–62 drawdowns 106–107 see also losses profit per dollar traded 35 programming languages 12 psychological factors see behavioral economics put-call parity relation 174 Python 12 quality 5 quantiles approximation 91 quintile distributions 104–105 quote-driven markets 208 random forest algorithm 124–125 random walks 11 ranking 90 RBM see restricted Boltzmann machine real estate investment trusts (REITs) 227 recommendations by analysts 182–183 recurrent neural networks (RNNs) 125 reduction of dimensionality 130–131 of noise 26 of overfitting 74–75, 269–270 of risk 108–109 Reg FD see Regulation Fair Disclosure region, WebSim 256 regions 85–86 regression models 10–11 regression problems 121 regularization 129 Regulation Fair Disclosure (Reg FD) 192 REITs see real estate investment trusts relationship models 26 relative prices 12–13, 26 relevance, of news 162 Renaissance Technologies 8 research 7–15 analyst reports 179–193 automated searches 111–120 backtesting 13–14 300Index behavioral economics 11–12 computer adoption 7–9 evaluation 13–14 exchange-traded funds 231–240 implementation 12–13 intraday data 207–216 machine learning 121–126 opportunities 14–15 perspectives 7–15 statistical arbitrage 10–11 triple-axis plan 83–88 restricted Boltzmann machine (RBM) 125 Reuleaux triangle 70 reversion alphas, five-day 55–59 risk 101–110 arbitrage 196–199 control 108–109 drawdowns 106–107 estimation 102–106 extrinsic 101, 106, 108–109 intrinsic 102–103, 105–106, 109 risk factors 26, 95–100 risk-on/risk off alphas 246–247 risk-reward matrix 267–268 RNNs see recurrent neural networks robustness 89–93, 103–106 rules 17–18 evaluation 20–21 see also algorithms; UnRule Russell 2000 IWM fund 225–226 SAD see seasonal affective disorder scale of automated searches 111–113 search engines, analyst reports 180–181 search spaces, automated searches 114–116 seasonality exchange-traded funds 237–238 futures and forwards 245–246 momentum strategies 157 and sunshine 46 selection bias 77–79, 117–118 sell-side analysts 179–180 see also analyst reports sensitivity tests 119 sentiment analysis 160–161, 188 shareholder’s equity 151 Sharpe ratios 71, 73, 74–75, 221, 260 annualized 97 Shaw, David 8 shrinkage estimators 131 signals analysts report 190, 191–192 cutting losses 20–21 data sources 25–26 definition 73 earnings calls 187–188 expressions 4 noise reduction 26, 72–75 options trading volume 174–177 smoothing 54–55, 59–60 volatility skew 171–173 volatility spread 174 sign correlation 65 significance tests 119 Simons, James 8 simple moving averages 55 simulation backtesting 71–72 WebSim settings 256–258 see also backtesting size factor 96 smoothing 54–55, 59–60 social media 165–166 sources of data 25–26, 43–44, 74–75 automated searches 113–114 see also data sparse principal component analysis (sPCA) 131 Spearman’s rank correlation 90 Index301 special considerations, financial statements 147 spin-offs 200–202 split-offs 200–202 spreads and liquidity 51 and volatility 51–52 stat arb see statistical arbitrage statistical arbitrage (stat arb) 10–11, 69–70 statistical models, machine learning 123 step-by-step construction 5, 41 storage costs 247–248 storytelling 80 subjectivity 17 sunshine 46 supervised machine learning 122 support vector machines (SVM) 122, 123–124 systemic bias 77–80 TAP see triple-axis plan tax efficiency, exchange-traded funds 233 teams 270–271 temporal-based correlation 63–64, 65 theory-fitting 80 thought processes of analysts 186–187 tick data 46 timestamping and bias 78–79 tracking errors 233–234 trades cost of 50–52 crossing effect 52–53 latency 46–47 trend following 18 trimming 92 triple-axis plan (TAP) 83–88 concepts 83–86 implementation 86–88 tuning of turnover 59–60 see also smoothing turnover 49–60 backtesting 35 control 53–55, 59–60 costs 50–52 crossing 52–53 examples 55–59 horizons 49–50 smoothing 54–55, 59–60 WebSim 260 uncertainty 17–18 underlying principles 72–73 changes in 109 understanding data 46 unexpected news 164 universes 26, 85–86, 239–240, 256 UnRule 17–18, 20–21 unsupervised machine learning 122 validation, data 45–46 valuation methodologies 189 value of alphas 27–30 value distortion, indices 228–230 value factors 96 value investing 96, 141 variance and bias 129–130 vendor